<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
TELECOM WIRELESS CORPORATION
(Name of Small Business Issuer in its charter)
UTAH 94-3172556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5299 DTC BOULEVARD, SUITE 1200
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices) (Zip Code)
(303) 357-0001
(Issuer's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is To Be Registered
------------------- ------------------------------
None N.A.
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. . . . 31
ITEM 3. DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . . 42
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . 43
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, promoters and control persons . . 44
ITEM 6. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 47
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 50
ITEM 8. DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . 52
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . 54
ITEM 2. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 55
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. . . . . . . . . . 55
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES. . . . . . . . . . . . . 55
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . 58
PART F/S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
ITEM 1. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
</TABLE>
ii
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Telecom Wireless Corporation is an Internet communications company.
The company's business plan calls for initial rapid growth through
acquisitions and subsequent organic growth. The company intends to
capitalize on the convergence of video, voice and data communications on the
Internet. The company intends to accomplish these objectives by providing
access or "connectivity" for Internet and other electronic communications,
Internet content and electronic commerce and other communications services.
The company's target markets include both residential and business customers.
The company plans to offer its products and services through subsidiaries it
has acquired recently and subsidiaries it will acquire in the future.
Key elements of the company's business strategy are:
- acquiring and consolidating geographically disparate ISPs, ASPs,
and CLECs;
- standardizing and centralizing the back office operations of
acquired companies, integrating their networks into a broadband
network and providing them with national customer and technical
support services;
- developing and offering additional value-added products and
services to customers, especially residential ISP customers, such
as bundled video, voice and data products and services through the
company's ASPs and CLECs; and
- building customer loyalty and gaining market share through unified
branding.
Telecom Wireless now owns and operates an ASP, Sys-Group, Inc. doing
business as Prentice Technologies, Inc. ("Prentice"); an ISP, America's Web
Station, Inc.; and a wireless cable television system, Keys Microcable
Corporation. Over the past few months the company's employees have conducted
accounting and legal due diligence and, in many cases, extensive contract
negotiations, with several ISP and ASP acquisition candidates, although none
are currently under letters of intent or parties to acquisition agreements
with Telecom Wireless.
The ability of Telecom Wireless to remain in business and implement
its business plan depends upon a variety of factors, primarily financing and
the ability to attract and retain employees having the necessary skills.
Funding operations and acquisitions has been and is expected to continue to
be the major impediment to implement its business plan. We need capital to
sustain operations and to consummate acquisitions. Management can give no
assurance that the company's capital requirements can be satisfied at all or
on reasonable terms.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET.
The Internet has become a global medium that enables millions of
people to obtain and share information, communicate and conduct business
electronically. The Internet has grown rapidly since its
1
<PAGE>
introduction to the general public in the early 1990's. Factors driving the
growth in the number of Internet users and the number of web sites include:
- the large and growing installed base of personal computers;
- advances in the performance and speed and reduction in cost of
personal computers and modems;
- improvements in network infrastructure;
- easier and cheaper access to the Internet;
- the increasing importance of the Internet as a communications
medium, and information resource and a sales and distribution
channel; and
- reliability of service by Internet access providers.
ACCESSING THE INTERNET.
Internet access services represent the means by which ISPs
interconnect business and consumer users to the Internet's resources. Access
services vary from dial-up modem access for individuals and small businesses
to high speed dedicated transmission lines for broadband access by large
organizations. An ISP provides Internet access either by developing a
proprietary network infrastructure or by purchasing access service from a
wholesale access vendor, or through a combination of both. The rapid
development and growth of the Internet have resulted in a highly competitive
and fragmented industry consisting of a few large national and regional ISPs
and a substantial number of local ISPs with small subscriber bases. Most
ISPs operate within a single state or city, with only a handful of ISPs, such
as EarthLink and MindSpring (which recently announced merger plans), having
expanded the scope of their operations from a single region to nationwide
coverage. Due to the disparity between the large number of smaller ISPs with
limited resources and the emergence of a limited number of national ISPs with
their associated economies of scale, the ISP industry is expected to undergo
substantial consolidation.
GROWTH IN ELECTRONIC COMMERCE.
For many businesses, the Internet has created a new communication and
sales channel that enables companies to interact with large numbers of
geographically dispersed consumers and businesses. In the last several
years, many companies have emerged that focus solely on the Internet as the
preferred medium for selling products or delivering services directly to
purchasers, bypassing traditional wholesale and retail channels.
Furthermore, traditional businesses are implementing sophisticated web sites
to effect electronic commerce initiatives that offer competitive advantages.
These businesses are deploying an expanding variety of Internet-enabled
applications, ranging from web site marketing and recruiting programs to
on-line customer interaction systems and integrated purchase order and
"just-in-time" inventory solutions for key customers and suppliers. These
capabilities require increasingly complex web sites and support operations.
In addition, advances in on-line security and payment mechanisms are
alleviating concerns associated with conducting transactions in an
open-platform environment, thus prompting more consumers and businesses to
use the Internet in conjunction with purchases and more businesses to offer a
greater breadth of electronic commerce services.
2
<PAGE>
OUTSOURCING OF INTERNET OPERATIONS.
As the Web increasingly becomes synonymous with electronic commerce,
businesses are placing greater emphasis on their Internet transaction and
communication operations. Internet-based companies, and to a growing extent,
traditional businesses, require non-congested and scalable Internet
operations to allow them to perform digital communication and commerce
transactions globally over the Internet. Due to constraints posed by the
lack of technical personnel with Internet skills or experience, the high cost
of advanced networking equipment and the complexity of innovative web
solutions, many businesses are unable internally to develop, maintain and
continually enhance their facilities and systems to conduct desired levels of
Internet-based activities. As a result of these constraints and other
factors, many businesses are seeking to outsource their facilities and
systems requirements as the preferred means for providing electronic commerce
solutions. To this end, an increasing demand is developing for:
- dedicated and broadband Internet access services to support
reliable, high speed and/or constantly connected Internet access
and communication;
- web hosting and co-location services which enable businesses to
obtain equipment, technical expertise and infrastructure for their
Internet needs on an outsourced basis; and
- end-to-end electronic commerce solutions to sell goods and
services on the web in a secure transaction environment.
By outsourcing their facilities and systems needs, businesses are able
to focus on their core competencies rather than expending vital resources to
support their Internet operations.
THE OPPORTUNITY FOR INTERNET SERVICE PROVIDERS.
The number of businesses and consumers accessing the Internet is
expected to increase significantly in the foreseeable future. Additionally,
as businesses and consumers are developing greater levels of comfort in the
use of the Internet for electronic commerce, businesses are increasingly
implementing sophisticated electronic commerce solutions which, in turn,
require significantly greater bandwidth and other business services. In
response, an increasing number of ISPs are augmenting their basic Internet
access services with a wide range of business services, including web hosting
and Internet security. These ISPs will be positioned to attain greater
economies of scale through lower network expansion and marketing costs on a
per-subscriber basis. Management believes that only a few ISPs, and in
particular, national ISPs, will be in a position to benefit fully from this
continued growth. These ISPs likely will be characterized by:
- quick response to market demands;
- reliable coverage on a nationwide basis;
- superior technical skills and customer support capabilities;
- electronic commerce expertise and business services capabilities;
- brand name recognition and the ability to exploit multiple
marketing channels; and
- relatively lower network costs.
3
<PAGE>
THE OPPORTUNITY FOR APPLICATION SERVICE PROVIDERS.
Rapid technological change in the information technology field,
coupled with the considerable investment of resources required by companies
to install and implement first tier enterprise applications software and
other business applications software, to maintain and update software and
equipment and to employ high quality information technology personnel, has
resulted in a growing number of corporate clients opting to access additional
outside computing resources that have already been set up at a network
location and are operated and maintained by skilled experienced specialists.
These outside resources are known as application services, and the
third-party vendors who operate and supply them have become known as
application service providers or ASPs. The application services are
delivered online, via high-speed communications networks and are paid for on
a subscription basis. The subscriber either leases the services over a period
of several years or on a month-to-month basis. Application services consist
of three primary segments; application outsourcing, application hosting and
websourcing.
Application outsourcing allows an organization to outsource individual
elements of its information technology or IT needs or outsource its entire IT
platform to an outside provider. Application outsourcing may involve as
little as desktop computer maintenance or the entire administration and
maintenance of important servers. It can also involve outsourcing entire
core business applications, such as enterprise resource planning, customer
relationship management, e-mail and groupware.
Applications hosting involves the provision of Internet servers and
support for interactive functions such as electronic commerce and customer
self-service that are hosted on web sites. ASPs can manage the customer web
sites as a complete service to the customer or on a partial basis where the
customer retains some responsibility for the site.
Websourcing involves the instant online rental of an individual
application or a bundled set of utilities to customers. This type of
websourcing allows customers to pick and choose from a variety of online
applications through a point and click Internet menu.
Application services may be provided by telecom carriers, ISPs, or
even hardware vendors, and therefore many of these telecommunications
industry participants are adding ASP services to their bundled packages.
THE OPPORTUNITY FOR COMPETITIVE LOCAL EXCHANGE CARRIERS.
The passage of the 1996 Telecommunications Act created a legal
framework for competitive telecommunications companies to provide local
analog and digital communications services in competition with the
traditional telephone companies. The 1996 Telecommunications Act eliminated a
substantial barrier to entry for competitive telecommunications companies by
enabling them to leverage the existing infrastructure built by the
traditional telephone companies, which required a $200 billion investment by
these telephone companies and their ratepayers, rather than constructing a
competing infrastructure at significant cost. The 1996 Telecommunications
Act requires traditional telephone companies, among other things, to:
- allow competitive telecommunications companies to lease copper
lines on a line by line basis;
- provide central office space for the competitive
telecommunications companies' DSL and other equipment used to
connect to the leased copper lines;
4
<PAGE>
- lease access on their inter-central office fiber backbone to link
the competitive telecommunications companies' equipment; and
- allow competitive telecommunications companies to use their
operational support systems to place orders and access their
- databases.
The 1996 Telecommunications Act was designed to create an incentive
for incumbent carriers that were formerly part of the Bell system to
cooperate with competitive carriers. These incumbent carriers cannot provide
long distance service until regulators determine that there is competition in
the incumbent carrier's local market.
OUR STRATEGY
The goal of Telecom Wireless is to become a full-service national
provider of Internet connectivity and enhanced Internet services to both the
consumer and business markets by combining national scale with local
presence. We intend to provide broadband connectivity through wireless and
other technologies, if available, to customers at an economical rate and to
rapidly integrate our acquisitions into a national network. Broadband
connectivity, if available, will allow us to offer bundled services at high
speeds and to develop and offer additional value-added products and services.
We intend to create shareholder value by building scale through the
acquisition, consolidating and integrating fragmented, independent ISPs, ASPs
and CLECs, and then leveraging our large scale to increase revenues and
reduce costs. The key elements of our strategy to accomplishing this goal
include:
- acquiring and consolidating independent ISPs, ASPs and CLECs for
cash and/or our common stock;
- standardizing our acquisition documents and procedures to minimize
costs;
- standardizing and centralizing the back office operations of our
acquisitions to capture operational efficiencies of scale by
- leveraging our national network infrastructure and customer
support services;
- developing and offering additional value-added products and
services to increase revenues from existing and future customers;
and
- building customer loyalty and gaining market share through
branding.
GROWTH THROUGH ACQUISITIONS.
We intend to establish a national presence and critical customer mass
by acquiring the stock or assets of, or making significant investments in,
established, independent ISP, and CLEC providers in selected geographic areas
throughout the U.S. and ASPs regardless of locale. We expect that these
acquisitions will broaden our market presence and expand our ability to offer
new products and services. Given the competitive market pressures, we
believe that these providers will continue to be attracted to and benefit
from the consolidation opportunity we provide.
5
<PAGE>
STANDARDIZE AND CENTRALIZE OPERATIONS AND CAPTURE ECONOMIES OF SCALE.
ISPS. More and more businesses are looking to ISPs as a source of
multi-tiered or bundled products and services. As businesses look to expand
their use of electronic commerce solutions, Internet Service Providers must
respond by offering the bandwidth, products and services required to meet
this demand. The Internet provides an additional medium for businesses to
market their products and services, and it provides consumers with a method
to research, compare, and purchase these products and services.
In addition to providing Internet access, ISPs traditionally offer
services to accommodate these needs. During the acquisition process the
company will evaluate each candidate's ability to offer these various
services and a "best in class" will be identified whenever possible. The
company will consolidate the service offerings of each acquisition into this
"best in class" organization. This will reduce costs and build the expertise
required to gain market leadership.
CLECS. CLECs compete with incumbent local exchange carriers (ILECs,
also referred to as Baby Bells or RBOCs) through low-cost resale agreements
and value-added bundled service packages. Initially, CLECs operated as basic
ILEC service resellers. CLECs have evolved by positioning themselves as
integrated communications providers (ICPs), offering a full suite of
telecommunications services that includes providing customers with voice,
data, Internet and video services. ICPs are often a result of strategic
partnerships or merged communication companies. The deregulation of the
telecommunications industry, changes in policy, and technological advances
have expanded service options for CLECs.
The company intends to integrate the broadband wireless and copper
pair technology into the acquired CLECs. The ability to provide a high
bandwidth connection at a significantly lower cost than the ILECs will create
opportunities for immediate market penetration and higher margins.
The organizational plan Telecom Wireless implements will be a critical
component of its ability to manage the rapid internal growth and disparate
operational units obtained through acquisitions. Telecom Wireless plans to
consolidate acquired ISPs and CLECs into as many as eight geographically
positioned operating units. At the same time, core administrative functions
must be centralized to obtain scale efficiencies and improve margins. We
currently plan to centralize network and back office administrative
operations in Denver, Colorado.
REGIONAL ROLL-UPS.
Telecom Wireless will hire key individuals from acquired businesses to
ensure a smooth transition and maintain local institutional knowledge. We
expect this will allow local operating units to maintain local presence as
Telecom Wireless develops its national brand. To help integrate
acquisitions, the company will establish integration teams. Each integration
team will consist of skilled technical and marketing personnel. The
integration team will have the responsibility to help with the overall
centralization, standardization, and eventual branding of the local company
as a part of the Telecom Wireless network. Additionally, the company's
accounting staff will work with the integration team to centralize the
accounting and billing systems which we expect to be able to accomplish
immediately after the acquisition. The company expects that integration of
other systems initially will require about 60 days for any acquisition,
although total integration of operations may take several months. Upon
completion of the initial integration process, the operating units will begin
executing the marketing and branding programs established by the company to
expand its customer base and improve its customer retention.
6
<PAGE>
CONSOLIDATION OF FUNCTIONS.
In order to maximize operating efficiencies and back office functions,
marketing, research, and network maintenance will be headquartered in one
location. Additionally, the company must take steps to maintain our existing
customers, attract new customers, offer new services, and increase margins,
such as establishing a common billing system, centralizing technical support
functions, and creating a national operations center to monitor the entire
network. The company recognizes that rapid and orderly consolidation and
integration of ISP operations is essential to increase profitability and for
orderly growth. We estimate reductions of ISP operating costs by
approximately 10% with a carefully executed plan of consolidation and
integration. However, the cost of integration and consolidation will be
substantial.
Our aggressive approach to consolidation must be tempered as local,
independent ISPs often are viewed by their subscribers as providing superior
service to that of national ISPs. Management believes that consolidation
efforts by national ISPs have been seriously flawed by a lack of sensitivity
to the essentially local nature of the ISP business, resulting in sharply
increased subscriber churn rates (post acquisition) and subsequent loss of
revenue. Telecom Wireless' efforts will be tempered with the understanding
that much of the appeal of acquired ISPs is based on the perception by
subscribers that their ISP is a local business.
- ACCOUNTING: A high priority for the company is installing a
common intranet accounting platform across all ISPs. Telecom
Wireless is currently evaluating accounting and billing platforms
for implementation. The selected platform will be flexible enough
to include on one bill all products and services we may choose to
offer in the future and be scalable to include any number of
subscribers.
- CONSOLIDATED TECHNICAL SUPPORT: The company plans to maintain a
national telephone technical support center to handle all consumer
problems, service inquiries and new subscriptions. Such a center
would reduce the need for support staff at each location, improve
service and facilitate our national marketing effort.
- WEB DESIGN AND STORAGE: It is our goal to move all ISP web design
and maintenance to our ASP division. Such a strategy should
eliminate the need for programmers at each local ISP.
- SYSTEMS ADMINISTRATION: Because so much of the cost of operating
an ISP is bound up in telecommunications, a natural inclination is
to quickly consolidate the technical operations that support and
monitor telecommunications. Each ISP maintains its own modem
banks, LAN, and routing to the Internet. Platforms range from
UNIX to NT to others. In addition, each ISP may have its own
upstream backbone as well as a CLEC. With all these interacting
factors, we plan to favor the quality of service over speed of
consolidation.
It is not the intent of the company to "re-invent" the wheel when it
comes to establishing these operational elements. While it is possible for
Telecom Wireless to build them internally, the company may seek to acquire or
merge with a national ISP which has many of the elements already in place.
INTEGRATION OF ISPS AND CLECS
Telecom Wireless' business plan calls for providing high-speed
connectivity and common services such as VoIP across ISPs and to all our
subscribers. To accomplish this goal, we will take a
7
<PAGE>
multi-faceted approach to integration of ISPs. Telecom Wireless presently
intends to utilize a "hub and spoke" configuration.
- CRITICAL MASS: For any ISP to be integrated, it must either: (a)
have sufficient capacity and staff to stand alone profitably and
act as a regional hub for smaller external acquisitions in the
same or contiguous regions or (b) be absorbed as an external
acquisition in a region where a Telecom Wireless hub already
exists. These smaller assets become spokes of the regional wheel.
Our plan calls for hub ISPs to "reside" on Network Access Points
(NAPs) providing redundant high speed access to the Internet.
Each hub will be equipped with high capacity switches capable of
handling voice and data traffic. Where appropriate, Telecom
Wireless intends to obtain CLEC status either by acquisition or
application to take advantage of the options such a designation
offers. Collectively, these hubs will form a larger critical mass
justifying connection of an ATM backbone to form a ubiquitous WAN
to be administered by Telecom Wireless staff at a central Network
Operations Center (NOC), expected to be housed in Denver.
In addition to providing a high speed-switching platform, we plan
that each hub ISP will provide the full compliment of
connectivity options including high-speed wireless access via
local metropolitan area wireless networks.
- BASELINE EVALUATION: Each potential acquisition will be evaluated
for baseline service capability, hardware suitability, and
strategic location and importance. Such an evaluation will help
in determining the cost and types of equipment that must be added
and/or upgraded, staffing, and marketing. This evaluation and
screening process also assists in determining a best course to
reduce or eliminate the cost of "last mile" services.
- VERTICAL INTEGRATION OF SERVICES: We expect our ISPs will offer
connectivity options including 56Kb dial up, dedicated ISDN, DSL,
and analog services, and point-to-point and multipoint wireless
connectivity. Our applications will include web design and
hosting and provision of all necessary components for electronic
commerce, such as construction of relational databases and market
baskets.
INTEGRATION OF APPLICATION SERVICE PROVIDERS
The company intends to provide content over its network, initially
through its acquired ASP services. Telecom Wireless expects to gain
experience in the ASP industry through Prentice Technologies, Inc., which
Telecom Wireless recently acquired. See "Part I, Item 1. Description of
Business --Acquisitions." Telecom Wireless expects to enhance revenue per
customer in its ISP and CLEC businesses while increasing shareholder value
through its ASP business.
The strategic plan for the company involves rapidly acquiring early
market share for enterprise application hosting. Nearly all planned growth
will come through acquisitions. Prentice is building the appropriate
management team to support this process. The operating business plan will
include modest organic growth for existing business units and the operations
necessary to conduct mergers and acquisitions.
Through this integration, we believe we will achieve a significant
degree of operational control and efficiency and will improve the quality,
consistency, and scale of our services. We will also leverage our national
presence by establishing peering relationships, obtaining favorable national
purchasing
8
<PAGE>
contracts, and developing strategic relationships with key hardware, software
and telecommunications providers. We will attempt to negotiate volume
purchase agreements with key vendors and establish peering relationships with
national ISP, ASP, and CLEC providers. Furthermore, we believe our scale
will allow us to support a high quality Internet platform and invest in
leading edge technology for network management, billing, customer service,
and financial information.
ACQUISITION STRATEGY
Growth through acquisitions represents the principal strategy of our
business plan. We expect to deepen and broaden our market presence,
strengthen our Internet connectivity, and enhance service capabilities
through acquisitions. Our early acquisitions will provide regional
integration hubs to validate our technology and marketing plans and provide
network infrastructure.
We intend to grow by acquiring and consolidating ASPs that may be
geographically dispersed. When our hub operations are identified, we will
target for acquisition ISPs and CLECs to increase our density in these
markets. We will focus on acquisition criteria including the following:
- rapid revenue and customer growth;
- low customer turnover or churn rate;
- limited competition; and
- enhanced products and services offered.
We believe ASPs and ISPs and CLECs in our target markets will be
attracted to and benefit from the opportunity to affiliate with us, based
upon, among other factors:
- empowering managers to use their local market knowledge to build
market share and density by providing services and products best
suited for these areas; and
- offering a combination of liquidity and upside potential through
equity ownership in a publicly traded entity to current owners
- and employees.
We expect that consolidation will create added value through
centralizing operations and systems, sharing of technology, branding and
bundling products and services. We plan to integrate acquired operations at
a divisional group level to:
- eliminate redundant network costs;
- consolidate operations; and
- retain sales staff and key managers.
Our plan is to pursue a regional acquisition strategy by targeting
independent, local ISPs in selected geographic areas. In each area, we will
seek a larger ISP to serve as the vehicle for integrating and optimizing the
networks and operations. In general, the acquisitions in each region will be
consolidated into integrated operating subsidiaries that are wholly owned by
us. In certain instances,
9
<PAGE>
some of the acquired providers may continue to exist as separate, wholly
owned subsidiaries, but operated as part of the local operating region.
MANAGEMENT OF THE COMPANY'S GROWTH
To implement our plan to expand rapidly through acquisitions, we will
need to implement additional management information systems capabilities,
further develop our operating, administrative and financial and accounting
systems and controls, improve coordination between engineering, accounting,
finance, marketing and operations, and hire and train additional personnel.
Our ability to manage rapid growth and disparate operational
methodologies will be dependent upon the operational plan we will implement
to integrate and consolidate these new operations. We plan to employ
managers in each of our geographical divisions to ensure the implementation
of our operational plan and the smooth transition of each of these
operations. Our plan generally is to identify employees of acquisitions who
we believe have the necessary technical and management skills to fill these
positions.
We will roll our ISPs and CLECs into geographic operating divisions.
We presently plan to have up to seven operating divisions, including Pacific,
Mountain, Southwest, Midwest, Northeast, Atlantic and ASP. Acquired
operations will be required to maintain local presence as we begin national
branding. We plan to establish integration teams to help integrate our
acquisitions.
We must establish, complete and expand our national network
infrastructure and support services to supply sufficient geographic reach,
capacity, reliability and security at an acceptable cost. This will require
that we enter into agreements with providers of infrastructure capacity and
equipment and support services. We do not yet know whether any or all of the
requisite agreements can be obtained on satisfactory terms and conditions.
To exchange traffic with ISPs, ASPs and CLECs without incurring
transit costs, we must establish and maintain peering relationships. As
Internet access and related services have expanded, so have peering
relationships and settlement charges continued to evolve. A small group of
dominant national ISPs have driven corporate peering policies. If the major
national ISPs increase requirements to maintain peering relationships with
them, we may have to comply with those additional requirements to maintain
our peering relationships. We also anticipate expanding and adapting our
network infrastructure to respond to a growing customer base, increased
demands to transmit larger amounts of data and changes to our customers'
product and service requirements. The expansion and adaptation of our
network infrastructure will require substantial financial, operational and
managerial resources.
While we believe there are various economies and efficiencies of scale
that can be realized as a result of acquiring and integrating businesses,
consolidating these businesses and implementing our strategic integration may
take significant time, will strain our resources, and could subject us to
additional expenses during the integration process. Our efforts to integrate
businesses we have acquired successfully and in a timely manner pose special
challenges. Whether we are able to do so effectively will have a material
effect on our business, financial condition and results of operations.
We do not have the capital, personnel, equipment, procedures or
systems in place required to implement our integration, consolidation and
standardization plan. In the short term, the businesses we acquire will
operate on a largely independent basis as subsidiaries of the company,
generally retaining their personnel, systems, procedures and employee
benefits. Depending upon the availability of capital, we will gradually
implement the plan. This means the company may not realize operational cost
savings for a significant period of time. However, to expedite the process,
we may seek to acquire or merge with
10
<PAGE>
one or more companies having established operational infrastructures and the
capacity to integrate, consolidate and standardize our operations quickly and
on a cost-effective basis.
SALES AND MARKETING
LOCAL SALES CONSULTATIONS.
We intend to offer our products and services through a sales approach
based on consultation between customers and technicians. The goal is to
thoroughly understand customer needs and provide bundled Internet
applications solutions consisting of hardware, software, access and
value-added services. We believe that this localized approach will allow us
to provide thorough customer solutions and appropriate ongoing support. We
expect to have significant distribution capabilities both through a direct
sales force and indirect channels. A direct sales force would offer a core
of technically competent, locally based and experienced Internet sales
representatives. We intend to focus our efforts on establishing and
expanding our direct sales force, further developing indirect channels and
optimizing techniques for generating leads to reduce the cost of obtaining
new customers.
DIRECT SALES.
Our plan is that sales representatives will be locally based, allowing
them to meet face-to-face with prospective customers to discuss their
Internet needs, technical requirements and develop tailored solutions.
Candidates for local sales representative positions must have a strong
Internet technical background and know the local business community. We will
have to develop programs at the national level to attract and train high
quality, motivated sales representatives who have good technical skills,
consultative sales experience and who know their local markets. These
programs must include technical sales training, consultative selling
techniques, sales compensation planning, and sales representative recruiting.
At the local level, direct marketing techniques will be employed to target
customer segments that would achieve substantial benefit from the business
applications afforded by the Internet. Some direct marketing tactics may
include direct mail, telemarketing, seminars and trade-show participation
which may be supported by some of our key vendors.
RESALE AND REFERRAL PROGRAM.
We plan to have an indirect sales program that will permit the
operating units in each division to make sales through other businesses,
called resellers, that make sales for us, or that refer customers to us. We
believe these indirect sales channels will be a significant contributor to
our growth. The authorized reseller program will offer reseller parties the
ability to share in the on-going revenue stream of sales they bring to us.
Reseller partners will include system integrators, value-added resellers and
other companies that have an established relationship with the prospective
customer, and have a sales force capable of selling Internet services.
Referrals may be made by organizations such as web designers, advertising
agencies or property managers. The referral program will also be available to
organizations that are less capable of or interested in selling Internet
services or those whose Internet services are not their core business. The
benefits of these programs to us will include greater market reach without
fixed overhead costs. The programs may also enable reselling and referring
parties to assist us in delivering complete solutions to customers.
ACQUISITIONS
KEYS MICROCABLE CORPORATION. In June 1998, Telecom Wireless acquired
all the issued and outstanding stock of Keys Microcable Corporation ("KMC").
KMC has operated a 32-channel wireless cable television system in the lower
Florida Keys and Key West, Florida, since 1994. KMC is
11
<PAGE>
performing engineering studies to expand its product line in its service area
to provide wireless Internet services to subscribers and new customers. The
expanded capabilities will include voice-over-Internet (VoIP). KMC served
approximately 1,600 cable TV subscribers as of September 30, 1999, and
management believes that approximately 50% of its current subscribers will
become Internet service subscribers and a smaller number will become
telephone customers as well.
AMERICA'S WEB STATION, INC. In July 1999, Telecom Wireless acquired
all the stock of America's Web Station, Inc. ("AWS"). AWS was founded in
1997 to provide Internet solutions to the rapidly expanding small to medium
size business market in southwest Florida. The initial focus was on high-end
database-driven web sites and e-commerce solutions. Internet access
(dial-up) and web site hosting for businesses subsequently was added. In the
first quarter of 1998, AWS began offering residential Internet service. Its
customer base has grown largely as a result of referrals. At September 30,
1999, AWS had 276 Internet access subscribers and 53 web site hosting
customers.
PRENTICE TECHNOLOGIES, INC. Telecom Wireless acquired 90% of the
common stock of Sys-Group, Inc., which does business as Prentice
Technologies, Inc. in September 1999 from Shawn P. Richmond, an officer of
the company. Prentice specializes in rapid prototyping,
performance-enhancing tools, and application hosting services for the
enterprise resource planning software of J.D. Edwards & Company. Through
Prentice, Telecom Wireless plans to focus on enterprise application hosting
and growth through an aggressive acquisition campaign, targeting companies
that are highly focused in areas that are complementary to the company's
strategy. Prentice has employees in Denver, Minneapolis, Austin, Knoxville,
and Toronto.
As part of its ASP aggregation strategy, Prentice expects to target
firms that can generate additional revenue through information technology
consulting, web hosting, web design, enterprise resource planning, global
messaging and customized software products available over the Internet.
While currently profitable, a primary emphasis of Prentice is on developing
the necessary management team and infrastructure to establish early market
share and sustained growth in the emerging application hosting market. It is
therefore likely that Prentice will experience negative cash flow for the
foreseeable future as it makes these strategic investments.
Significant post-closing covenants of the Merger Agreement between the
company and Prentice are as follows:
- Telecom Wireless will use "commercially reasonable efforts" to
spin-off Prentice by September 22, 2001.
- Telecom Wireless and Mr. Richmond will take all commercially
reasonable best efforts necessary to release Mr. Richmond from his
personal guaranties of Prentice debt by September 22, 2001.
Telecom Wireless deposited 200,000 restricted shares of its common
stock into an escrow account to collateralize its obligations to
relieve Mr. Richmond of his personal guaranties of Prentice debt,
which shares will be returned to Telecom Wireless once such
obligations are released or satisfied or the underlying agreements
are terminated.
- Telecom Wireless will provide piggyback registration rights, at
the expense of Prentice, for all stock owned by Mr. Richmond in
Prentice and any stock of Telecom Wireless subsequently acquired
pursuant to options held by Mr. Richmond or any employees of
Prentice.
12
<PAGE>
In addition, Mr. Richmond entered into a three-year contract whereby
he is employed as a Vice President of Telecom Wireless and President of
Prentice through March 31, 2002. See "Part I, Item 6. Executive
Compensation."
Mr. Richmond has the right to repurchase the Prentice stock from
Telecom Wireless for consideration consisting of the company's common stock
received by Mr. Richmond plus cash in the amount of the increase in the
shareholders' equity of Prentice, should any of the following occur:
- A bankruptcy petition is filed by or against Telecom Wireless and
not discharged in 60 days.
- Telecom Wireless admits in writing its inability to pay its debts
as they mature.
- Telecom Wireless ceases to be a going concern.
Mr. Richmond seeks rescission of his sale of 90% of the common stock
of Prentice to Telecom Wireless. See "Part II, Item 2. Legal Proceedings."
OTHER TRANSACTIONS
The company has entered into several transactions with Joshua Mailman.
The company has granted Mr. Mailman the right, exercisable at any time until
February 1, 2000, to cause the company to purchase from Mr. Mailman a total
of 2,600,000 shares of the capital stock of International Datacasting
Corporation, a Canadian corporation based in Ottawa, Ontario, Canada ("IDC").
The purchase price is $1.00 per share in cash or, at the option of Mr.
Mailman, in the form of a note or the equivalent value of the company's
common stock. In addition, the company agreed to purchase from Mr. Mailman
an additional 2,000,000 shares of IDC common stock upon the same terms within
30 days after the date of the first purchase. To the extent Mr. Mailman
elects to take shares of the company's common stock in payment for the IDC
stock, the stock will be valued at the lower of US $5.00 per share or 70% of
the market price on the date of the transaction. IDC is a public Canadian
company whose stock is traded on the Montreal Stock Exchange (symbol: IDA).
IDC is engaged in the business of selling advanced satellite communications
products. It claims to own applications that include internet via satellite,
corporate intranets, radio networks, business radio networks, weather
networks, financial information, sports updates, paging networks and email
transmission. It also claims to have more than 25,000 installations in 35
countries.
The company has agreed to enter into a financial consulting agreement
with Mr. Mailman whereby he will provide financial review, analysis and
consulting services to the company for a period of one year. As
consideration, the company has agreed to issue to Mr. Mailman a three-year
warrant for the purchase of 100,000 shares of the company's common stock at
an exercise price of $6.25 per share. The company can terminate the
financial consulting agreement at any time upon the giving of ten days'
written notice to Mr. Mailman.
In October 1999, James C. Roberts, Chief Executive Officer and
Chairman of the Board of Directors of the company, sold an option to Mr.
Mailman to purchase 250,000 shares of the company's common stock from Dr.
Roberts for $250,000. The term of the option is two years and the option
exercise price is $.10 per share. Dr. Roberts loaned the $250,000 to the
company. See "Part I, Item 7. Certain Relationships and Related
Transactions." Mr. Mailman has registration rights with respect to such
shares.
13
<PAGE>
Mr. Mailman and Allen Leeds, an officer of the company (see "Part I,
Item 5. Directors, Executive Officers, Promoters and Control Persons -- Other
Officers"), are the co-owners of First Broadcast Partners, LLC, a wireless
spectrum holding company based in New York, New York.
COMPETITION
The market for Internet connectivity and related services is extremely
competitive. We anticipate that competition will continue to intensify as
use of the Internet grows. The rapid growth and potential market size of the
Internet access market has attracted many new start-ups, as well as existing
businesses from different industries. In addition to other national,
regional and local ISPs, ASPs and CLECs, current and prospective competitors
include long distance and local exchange telecommunications companies, cable
television companies, direct broadcast satellite and wireless communications
providers, and on-line service providers. We believe the primary competitive
factors determining success for ISPs in the markets we expect to serve are:
- a reputation for reliability and high quality service;
- effective customer support;
- access speed;
- pricing;
- effective marketing techniques for customer acquisition;
- ease of use; and
- scope of geographic coverage.
We believe that national providers lack a local presence that
customers demand and local providers lack the technical and human resources
required to offer enhanced services cost effectively. By creating a national
network of ISPs, ASPs and CLECs, our customers will obtain the benefits of a
global infrastructure with personal, around-the-clock customer support. We
believe that national scale and local presence will result in long term
customer loyalty and help expand our customer base. We intend to enhance
this value as we continue to develop by expanding our network through
acquisitions and strategic vendor relationships and providing a comprehensive
array of enhanced, higher-margin products and services such as electronic
commerce.
ISPS.
According to BOARDWATCH magazine's directory of ISPs, there are
currently over 4,000 national, regional and local ISPs in the United States.
Our current primary competitors include other ISPs with a significant
national presence which focus on business customers. These competitors
include UUNet, GTE Internet working (formerly BBN), PSINet, Concentric
Network and DIGEX. While we believe that our planned level of local service
and support and focus on the target market will distinguish us from these
competitors, most of them have significantly greater market presence, brand
recognition, and financial, technical and personnel resources than we do, and
have extensive coast-to-coast Internet backbones. We also compete with
unaffiliated regional and local ISPs and ASPs in our targeted geographic
regions
14
<PAGE>
TELECOMMUNICATIONS CARRIERS.
All the major long distance companies (also known as interexchange
carriers or IXCs), including AT&T, MCI, and Sprint, offer Internet access
services and compete with us. The recent sweeping reforms in the federal
regulation of the telecommunications industry have created greater
opportunities for local exchange carriers ("LECs"), including the regional
bell operating companies ("RBOCs"), to enter the Internet connectivity
market. To address the Internet connectivity requirements of the current
business customers of long distance and local carriers, IXCs are partnering
with, and/or acquiring, ISPs. The WorldCom/MFS/UUNet consolidation, the
NETCOM/ICG merger, the Intermedia/DIGEX merger, and GTE's acquisition of BBN
are examples. Accordingly, we expect that Telecom Wireless will experience
increased competition from the traditional telecommunications carriers. Many
telecommunications carriers, in addition to their substantially greater
network coverage, market presence, and financial, technical and personnel
resources, also have large existing commercial customer bases. Furthermore,
telecommunications providers may be able to bundle Internet access with basic
local and long distance telecommunications services. Bundling services may
make it more difficult to compete effectively with the telecommunications
providers and may result in pricing pressure that would have an adverse
effect our business, financial condition and results of operations. We
believe combining local presence with a strong technical and data-oriented
sales force could be an important feature distinguishing us from the
centralized voice-oriented sales approach typified by the current Internet
connectivity services offered by the IXCs and LECs.
CABLE COMPANIES, DIRECT BROADCAST SATELLITE AND WIRELESS COMMUNICATIONS
COMPANIES.
Many major cable companies have announced that they are exploring the
possibility of offering Internet connectivity, by using cable modems and
upgrading their networks. MediaOne Group and TCI have recently announced
trials to provide Internet cable service to residential customers in select
areas. However, the cable companies are faced with large-scale upgrades of
their existing plant, equipment and infrastructure to support connections to
the Internet backbone via high-speed cable access devices. Additionally,
their current subscriber base and market focus is residential, which requires
that they join with business-focused providers or undergo massive sales and
marketing and network development efforts to target the business sector.
Several announcements also have recently been made by other alternative
service companies that are approaching the Internet connectivity market with
various wireless terrestrial and satellite-based service technologies, which
currently offer high-speed Internet access to business customers.
ON-LINE SERVICE PROVIDERS AND CABLE AND TELEPHONE COMPANIES.
The predominant on-line service providers, including America Online,
CompuServe, Microsoft Network, and Prodigy, have all entered the Internet
access business by engineering their current proprietary networks to include
Internet access capabilities. We plan to compete to a lesser extent with
these on-line service providers. The offerings of the on-line service
providers may significantly affect the pricing of our service offerings.
BROADBAND SERVICE PROVIDERS.
Advanced Internet applications and quicker access require additional
bandwidth. In the last year or two, several cable and telephone companies
have announced plans to deploy broadband services for high speed Internet
access through new technologies such as cable modems and xDSL. While these
providers have initially targeted the residential consumer, it is likely that
their target markets will expand to encompass our target markets, which may
significantly affect the pricing of our service offerings. As a
15
<PAGE>
result of an increase in the number of competitors, and vertical and
horizontal integration in the industry, we expect to encounter significant
pricing pressure and other competition in the future. Advances in technology
as well as changes in the marketplace and the regulatory environment are
constantly occurring. We cannot predict the effect that ongoing or future
developments may have on us or the pricing of our products and services. We
intend to continue to improve our products and services to remain competitive.
With respect to our potential competitors, we believe that
manufacturers of computer hardware and software products, media and
telecommunications companies and others will continue to enter the Internet
services market, which will intensify competition. In addition, as consumers
and businesses increasingly move on-line in greater numbers, we expect
existing competitors to increase further their emphasis on Internet access
and electronic commerce initiatives, resulting in even greater competition
for us in our markets. The ability of competitors or others to enter into
business combinations, strategic alliances or joint ventures, or to bundle
their services and products with Internet access, could place us at a
significant competitive disadvantage.
GOVERNMENTAL REGULATION
REGULATION OF INTERNET ACCESS SERVICES.
We provide Internet access, in part, using telecommunications services
provided by carriers. Terms, conditions and prices for telecommunications
services are subject to economic regulation by state and federal agencies.
We, as an Internet access provider, are not currently subject to direct
economic regulation by the Federal Communications Commission or any state
regulatory body, other than the type and scope of regulation that is
applicable to businesses generally. In April 1998, the Federal
Communications Commission reaffirmed that Internet access providers should be
classified as unregulated "information service providers" rather than
regulated "telecommunications providers" under the terms of the Federal
Telecommunications Act of 1996. As a result, we are not subject to federal
regulations applicable to telephone companies and similar carriers merely
because we provide our services using telecommunications services provided by
third-party carriers. To date, no state has attempted to exercise economic
regulation over Internet access providers.
Governmental regulatory approaches and policies to Internet access
providers and others that use the Internet to facilitate data and
communication transmissions are continuing to develop and in the future we
could be exposed to regulation by the Federal Communications Commission or
other federal agencies or by state regulatory agencies or bodies. For
example, the Federal Communications Commission has expressed an intention to
consider whether to regulate providers of voice and fax services that employ
the Internet or IP switching as "telecommunications providers" even though
Internet access itself would not be regulated. The Federal Communications
Commission is also considering whether providers of Internet-based telephone
services should be required to contribute to the universal service fund,
which subsidizes telephone service for rural and low income consumers, or
should pay carrier access charges on the same basis as applicable to
regulated telecommunications providers. To the extent that we engage in the
provision of Internet or Internet protocol based telephony or fax services,
we may become subject to regulations promulgated by the Federal
Communications Commission or states with respect to such activities. We
cannot assure you that such regulations will not adversely affect our ability
to offer certain enhanced business services in the future.
Furthermore, in a rulemaking proposal issued in August 1998, the
Federal Communications Commission has proposed that if an incumbent local
exchange carrier establishes a separate affiliate to pursue the deployment of
advanced telecommunications services, such as those we offer, and if that
affiliate interconnects with the incumbent local exchange carrier's network
on the same terms and
16
<PAGE>
conditions as offered to the incumbent local exchange carrier's competitors,
then the affiliate would not be subject to the unbundling, discounted resale
or co-location obligations in the Federal Telecommunications Act of 1996 that
apply to incumbent local exchange carriers. Rather, the affiliate would be
treated like a competitive local exchange carrier. If the Federal
Communications Commission ultimately adopts this or any similar proposal, we
would likely face increased competition from incumbent local exchange carrier
affiliates and our access to providers of high speed data technology could be
curtailed, which could materially and adversely affect our business,
operating results and financial condition.
REGULATION OF THE INTERNET.
Due to the increasing popularity and use of the Internet by broad
segments of the population, it is possible that laws and regulations may be
adopted with respect to the Internet pertaining to content of web sites,
privacy, pricing, encryption standards, consumer protection, electronic
commerce, taxation, and copyright infringement and other intellectual
property issues. We cannot predict the effect, if any, that any future
regulatory changes or developments may have on the demand for our access or
enhanced business services. Changes in the regulatory environment relating
to the Internet access industry, including the enactment of laws or
promulgation of regulations that directly or indirectly affect the costs of
telecommunications access or that increase the likelihood or scope of
competition from national or regional telephone companies, could materially
and adversely affect our business, operating results and financial condition.
REGULATIONS PERTINENT TO OUR COMPETITIVE LOCAL EXCHANGE CARRIER
OPERATIONS.
To the extent that we conduct business as a competitive local exchange
carrier, the telecommunications services that we provide will be subject to
regulation by federal, state and local governmental agencies. State
regulatory commissions exercise jurisdiction over intrastate services.
Municipalities and other local government agencies may regulate certain
aspects of our competitive local exchange carrier subsidiary's proposed
operations, such as use of rights-of-way. Although typically start-up
telecommunications carriers are not subject to all of the Federal
Communications Commission regulations applicable to incumbent local exchange
carriers, such as price caps or rate-of-return regulation, the Federal
Telecommunications Act of 1996 requires the Federal Communications Commission
to establish a subsidy mechanism for universal telephone service to which our
competitive local exchange carrier subsidiary will be required to contribute
based on its telecommunications revenues. In addition, the Federal
Telecommunications Act of 1996 requires all carriers, including competitive
local exchange carriers and incumbent local exchange carriers, to make their
services available for resale by other carriers, to interconnect their
networks and ensure they interoperate and provide non-discriminatory
rights-of-way, offer reciprocal compensation for termination of local
telecommunication traffic, and provide dialing parity and local telephone
number portability. The Federal Telecommunications Act of 1996 further
reserves to the individual states the authority to impose state regulation of
local exchange services, including state universal service subsidy programs,
so long as the state's regulations are not inconsistent with the requirements
of the Federal Telecommunications Act of 1996. We are unable to predict the
manner in which any state where we may receive certification as a competitive
local exchange carrier, will seek to regulate our telecommunications
operations.
In the provision of interstate, intrastate and international services,
our competitive local exchange carrier operation would generally be subject
to tariff or price list filing requirements pursuant to which the competitive
local exchange carrier operation will be required to publicly disclose, or in
some instances obtain approval of, its terms, conditions and prices for
telecommunications services prior to or soon after offering such services.
In addition, individual states where our operation conducts activities as a
competitive local exchange carrier may subject us to state certification
proceedings and intrastate and
17
<PAGE>
local tariff regulations. These certifications generally require a showing
that the carrier has adequate financial, managerial and technical resources
to offer the proposed services consistent with the public interest. While
uncommon, challenges to these tariffs and certification proceedings by third
parties could cause our competitive local exchange carrier operation to incur
substantial legal and administrative expenses. Many states also impose
additional regulatory requirements, such as minimum service quality reporting
and customer service requirements and uniform local exchange carrier
accounting requirements. Under some state laws, changes in the ownership of
a competitive local exchange carrier's outstanding voting securities may
require prior approval of the state public utility commission. In certain
jurisdictions, an investor who acquires as little as 10% of a competitive
local exchange carrier's voting securities may have to obtain prior approval
for the acquisition of such securities because such ownership interest might
be deemed to constitute an indirect controlling interest in the carrier.
FINANCING ARRANGEMENTS
JACK AUGSBACK & ASSOCIATES, INC. In March 1999, the company entered
into an agreement whereby Jack Augsback & Associates, Inc., West Palm Beach,
Florida, agreed to research and find sources for the company's various needs
of financing and to make introductions to persons capable of providing such
financing to the company. If any person introduced to the company by
Augsback provides any investment capital or other types of financing, the
company is obligated to pay Augsback 10% of the first $10,000,000 of capital,
7.5% of the following $5,000,000 of capital, and 5% of any balance. The fee
is payable in cash at closing. The company also agreed to pay Augsback a
non-accountable project expense fee in the amount of 1% of the financing.
In addition, the company agreed to issue five-year warrants to
Augsback for the purchase of up to five shares of the company's common stock
for each $100 of funds raised at an exercise price equal to 85% of the fair
market value of the company's common stock for the 20 trading days prior to
closing of the financing. The holders of the warrants were granted piggyback
registration rights with respect to the underlying shares and the company
agreed to pay all costs of registration. As of November 19, 1999, the
company had issued warrants for the purchase of up to 150,487 shares of its
common stock to Augsback and its affiliates and 22,650 shares of such common
stock to affiliates of Augsback.
The Augsback agreement is effective through December 31, 1999.
Pursuant to that agreement, Augsback introduced the company to investors who
purchased securities for net proceeds to the company aggregating $3,868,745.
FIRST EQUITY CAPITAL SECURITIES, INC. First Equity Capital
Securities, Inc., New York, New York, raised $1,000,000 in bridge loan
financing for the company and introduced the company to a person which loaned
it $700,000. A cash fee is payable to First Equity equal to 10% of any of
the gross proceeds of any equity financing provided by persons introduced to
the company by First Equity plus a five-year warrant to purchase securities
equal to 10% of the securities purchased in any such offering. If First
Equity introduces the company to a person who locates financing for the
company, then the fee to First Equity is 2.5% of the gross proceeds thereof
payable in cash. If any of the bridge loan lenders convert their bridge
loans into Telecom Wireless common stock, the company will be obligated to
pay First Equity 10% of the gross amount of the conversion proceeds.
The company agreed to pay First Equity a cash fee equal to 6% of the
gross proceeds from any debt financing provided by persons introduced to the
company by First Equity and 1.25% of the gross proceeds from any financing
provided through persons secured or arranged by any agent.
On October 15, 1999, the company entered into a supplemental agreement
with First Equity whereby the company agreed to issue five-year warrants to
First Equity to purchase 300,000 shares of the
18
<PAGE>
company's common stock at a price of $.001 per share and to provide
piggyback registration rights for the underlying shares. In addition, the
company agreed to pay First Equity a monthly consulting fee of $7,500
commencing in November 1999 and continuing for at least one year. In
consideration, First Equity agreed to waive fees due and payable to it for
having obtained the $1,000,000 in bridge loans and the $700,000 loan obtained
from a third party, consisting of cash in the amount of $87,500 and warrants
for the purchase of 30,000 shares of the company's common stock, exercisable
for a period of five years at an exercise price of $7.00 per share. First
Equity has exercised the warrant.
INTELLECTUAL PROPERTY
We expect to receive authorization to use the products of each
manufacturer of software that is bundled in our software for users with
personal computers operating on the Windows or Macintosh platforms. While
certain of the applications included in our start-up kit for ISP subscribers
will be shareware that we have obtained permission to distribute or that are
otherwise in the public domain and freely distributable, certain other
applications included in the start-up kit will be licensed where necessary.
We currently intend to maintain or negotiate renewals of all existing
software licenses and authorizations as necessary, although we cannot be
certain that such renewals will be available to us on acceptable terms, if at
all. We may also enter into licensing arrangements in the future for other
applications.
EMPLOYEES
As of November 19, 1999, Telecom Wireless had 22 full-time employees,
including its five executive officers. The company's employees are not
covered by any collective bargaining agreement, and it has never experienced
a work stoppage. Management believes that the company's employee relations
are good.
At present, Telecom Wireless generally is divided into four divisions
plus general and administrative staff. Due to our small size, these
divisions of necessity overlap. The merger and acquisitions group consists
of four full-time employees. It is responsible for identifying and
contacting acquisition candidates, conducting preliminary due diligence,
initiating and completing contract negotiations, and closing transactions.
This group is heavily dependent upon the services of outside professionals,
primarily in the areas of legal and accounting.
The operations and technology group consists of three full-time
employees. It is responsible for internal operations, accounting,
operational and technical due diligence with respect to acquisition targets
and refinement and implementation of our consolidation and integration plan.
As our operations expand, this group will be subdivided into several separate
divisions. We expect the divisions will grow rapidly, primarily due to
personnel requirements for consolidation and integration of operations.
The finance group consists of two full-time employees while the law
group consists of three full-time employees. The remaining employees assist
these divisions and perform other functions such as sales, marketing and
accounting.
As of November 19, 1999, America's Web Station, Inc. had five
full-time employees, while Keys Microcable Corporation and Prentice
Technologies, Inc. had seven and 15 full-time employees, respectively.
19
<PAGE>
RISK FACTORS
The risks described below are not the only risks Telecom Wireless
faces. If any of the contingencies discussed in the following paragraphs or
other materially adverse events actually materialize, the business, financial
condition and results of operations of Telecom Wireless could be materially
and adversely affected. In such a case, the trading price of the company's
common stock could decline.
SUBSTANTIAL DOUBT EXISTS AS TO THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN
The company's independent auditor's report on the June 30, 1999,
financial statements contains an explanatory paragraph which indicates there
is substantial doubt as to the company's ability to continue as a going
concern. Telecom Wireless incurred net losses of approximately $3,537,000 and
$2,886,000 for the year ended June 30, 1999 and for the quarter ended
September 30, 1999, respectively, and had an accumulated deficit of
approximately $6,566,000 as of September 30, 1999. During the same periods,
the company had negative cash flows from operations of approximately
$1,421,000 and $1,340,000, respectively. Management expects that the
company's costs and expenses will continue to increase in future periods,
which could negatively affect operating results.
When current management assumed control of Telecom Wireless in
mid-April 1999, the market for Internet and Internet-related stocks was
strong. Beginning in early July 1999, however, the market for certain of such
securities weakened considerably, and the market prices for many Internet
stocks fell by 50% or more. As a result, it has become increasingly difficult
for the company to obtain either debt or equity financing to fund operations
or acquisitions. This has forced management to obtain high cost short-term
financing to cover operating expenses and to postpone acquisition activities.
MANAGEMENT EXPECTS THE COMPANY TO CONTINUE TO SUSTAIN LOSSES
Even though its goal is to acquire profitable companies, management
projects that Telecom Wireless will continue to incur net losses and
experience negative cash flow for the foreseeable future. A variety of
factors lead management to this conclusion, including the substantial costs
of consolidating and integrating operations of acquired companies, ongoing
merger and acquisition activities and non-cash compensation expense due
primarily to issuing options to officers and others at exercise prices below
the fair market value of the company's common stock at the time of the dates
the options were granted. Management cannot be certain that revenues will
continue to grow, or that the company will obtain sufficient revenues to
achieve profitability. If Telecom Wireless does achieve profitability,
management cannot be certain that the company can sustain or increase
profitability in the future.
TELECOM WIRELESS MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL IT NEEDS
TO GROW ITS BUSINESS
Telecom Wireless intends to grow primarily by acquiring additional
businesses using a combination of cash and common stock. Merger and
acquisition activities consume a substantial amount of cash, not only
internally for salaries, travel and other costs, but also for outside
attorneys, accountants and other experts whose services are required. Telecom
Wireless also will need substantial additional capital to deploy a national
network system and infrastructure and to fund capital expenditures for
equipment, product development, marketing, sales and customer support
capabilities. The company also may need to fund operating losses in amounts
we cannot determine at this time. Management anticipates that the company's
cash requirements for the next several months will include disbursements for
some or all of the following purposes:
20
<PAGE>
- acquisition of additional businesses;
- expansion of sales and marketing operations;
- acquisition and expansion of a national network system and
infrastructure;
- development of business services offerings; and
- working capital and general corporate purposes.
Management expects the company to meet its additional capital needs
through sales of equity and debt securities, credit facilities and other
borrowings and lease financings. Management is not sure whether it will be
able to raise sufficient capital through these or any other methods. If it
cannot, management may be required to delay or abandon some acquisition and
development plans for the company, which would limit the company's growth and
may limit its ability to compete in the Internet sector. As of the date of
this prospectus, management does not have commitments for any additional
financing and cannot be sure that it will be able to obtain any such
commitments at all or upon reasonable terms and conditions.
FAILURE TO INTEGRATE ACQUISITIONS SUCCESSFULLY MAY ADVERSELY AFFECT
TELECOM WIRELESS' OPERATING RESULTS
The success of Telecom Wireless depends significantly on its ability
to integrate the operations and management of the businesses that it has
acquired and businesses that it may acquire in the future. The company will
have to expend substantial managerial, operating, financial and other
resources to integrate these businesses. In particular, the company must
install and standardize adequate operational and control systems, deploy
certain equipment and telecommunications facilities, implement new marketing
efforts in new as well as existing locations, employ qualified personnel to
provide technical and marketing support for the company's various operating
sites and continue expansion of the company's managerial, operational,
technical and financial resources.
Consolidating acquired businesses and integrating regional operations
may take a significant period of time, will place a significant strain on the
company's resources and could prove to be more expensive than expected. The
company may increase expenditures to accelerate the integration and
consolidation of the company's acquired operations to generate long term cost
savings and improved profitability. These expenses may include the following,
among others:
- eliminating redundant staffing positions;
- personnel relocation;
- canceling overlapping Internet access contracts;
- system upgrades; and
- integrating acquired operations into a national network system.
Management cannot guarantee that the company's projected long term
cost savings and improvements in profitability can or will be realized. It
also cannot assure that customer support resources
21
<PAGE>
will be sufficient to manage growth of the company's business or that
management will be successful in implementing its expansion program for the
company in whole or in part.
TELECOM WIRELESS HAS A LIMITED OPERATING HISTORY
Current management assumed control of Telecom Wireless and adopted a
new business plan in April 1999. The business plan envisions Telecom Wireless
operating as an ISP, ASP and CLEC and growing through acquisitions. Although
the companies acquired or to be acquired by Telecom Wireless may have
individual operating histories, as a combined entity, Telecom Wireless has a
limited operating history. Telecom Wireless may encounter risks and
difficulties in building and operating a business in the rapidly evolving
telecommunications sector, especially given its limited operating history.
These risks include the company's ability to:
- expand its client and customer base and increase client and
customer revenues;
- compete favorably in highly competitive markets;
- access sufficient capital to support its growth;
- recruit and retain qualified employees;
- introduce new products and services; and
- build a national network system and infrastructure.
Management cannot be certain that the company will successfully
address any of these risks.
THE COMPANY'S OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
As a result of the company's limited operating history, management
cannot forecast the company's operating expenses based on historical results.
Accordingly, management establishes the company's expense levels in advance
based in part on management's projections of the company's future revenues.
The company's future revenues will depend heavily on management's ability to
acquire businesses, to attract and retain subscribers and business customers
and to increase per subscriber revenues. Telecom Wireless may also experience
seasonal variations in the use of its services that could cause its revenues
to vary. If the company's actual revenues are less than the company's
projected revenues, the company may be unable to reduce expenses
proportionately, and the company's operating results, cash flows and
liquidity would likely be adversely affected.
The company's revenues and operating results may fluctuate
significantly from quarter to quarter. A number of factors are likely to
cause these fluctuations, including:
- the effect of potential acquisitions;
- the rate of new ISP subscriber acquisitions and subscriber
retentions;
- development of ASP clients and acquisition of ASP businesses;
- changes in the company's pricing policies or those of the
company's competitors;
22
<PAGE>
- capital expenditures and other costs relating to expanding the
company's operations;
- the timing of new product and service announcements by the company
or its competitors;
- market acceptance of new and enhanced versions of the company's
products and services;
- personnel changes;
- the introduction of alternative technologies; and
- increased competition in the company's markets.
TELECOM WIRELESS MAY ENCOUNTER PRICING PRESSURE DUE TO INTENSE
COMPETITION
The telecommunications services business, including the Internet
services sector, is extremely competitive and is changing rapidly.
Competition could result in loss of the company's customers and reduction of
the company's revenues.
The tremendous growth and potential market size of the Internet market
in which the company competes has attracted many new start-ups as well as
established businesses from different industries. Current and prospective
competitors include other national, regional and local ISPs, ASPs, CLECs,
long distance telecommunications carriers, cable television companies, direct
broadcast satellite and wireless communications providers and on-line service
providers. Telecom Wireless' competitors are expected to include AT&T, MCI,
Sprint, UUNet, GTE, PSINet, Concentric Network and DIGEX. Most of the
company's competitors have significantly greater market presence, brand
recognition, and financial, technical and personnel resources than the
company has, and also have extensive coast-to-coast Internet backbones and
large customer bases.
Management also expects to face increasing competition from Internet
providers using alternative technologies including:
- telecommunications providers that bundle Internet access with
basic local and long distance telecommunications services, which
could force the company to price its services at a level that
would have an adverse effect on the company's business, financial
condition and results of operations;
- major cable companies such as AT&T as they begin to offer Internet
connectivity through their cable infrastructure, which is designed
to increase the connection speed to the Internet; and
- other alternative service companies that are approaching the
Internet connectivity market with various wireless terrestrial and
satellite-based service technologies, which currently offer
high-speed Internet access to business customers.
As a result of the increased number of competitors and the continued
vertical and horizontal integration in the industry, management expects the
company to encounter significant pricing pressure. Management cannot be
certain that the company will be able to offset the effects of any required
price reductions through an increase in the number of its subscribers,
higher revenues from business services, cost reductions or otherwise, or that
Telecom Wireless will have the resources to continue to compete successfully.
23
<PAGE>
MANAGEMENT'S PLANNED AGGRESSIVE GROWTH WILL STRAIN THE COMPANY'S
RESOURCES
Management intends to expand the company's operations rapidly through
acquisitions by aggressively pursuing existing and potential market
opportunities. This rapid growth will place a significant strain on the
company's managerial, operational and financial resources. In particular,
management plans to acquire companies that provide or can provide a national
network system and infrastructure and then expand the network through the
acquisition and installation of necessary equipment, extensive marketing
efforts in new locations and the employment of qualified technical, marketing
and customer support personnel.
To manage our growth, management must improve the company's
operational systems, procedures and controls on a timely basis by
centralizing and standardizing the company's operations and upgrading and
replacing outdated infrastructure. If the demands placed on the company's
network resources by the company's growing subscriber base outpace its growth
and operating plans, the quality and reliability of the company's service may
decline and relationships with customers may be harmed as a result.
IF MANAGEMENT IS UNABLE TO ESTABLISH SATISFACTORY PEERING RELATIONSHIPS,
THE COMPANY'S COSTS MAY INCREASE
Management intends to establish and maintain "peering" relationships
with other ISPs, ASPs and CLECs so that the company can exchange traffic
without paying transit costs. If management is unable to establish adequate
peering relationships, the company's costs will increase and our revenues
could decrease. This would harm the company's business, financial condition
and results of operations.
MANAGEMENT'S INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD
WEAKEN THE COMPANY
Management may not be able to attract and retain key employees. This
could hinder or delay the company's acquisition, consolidation and
integration plans, product development and marketing efforts. Competition for
qualified employees and personnel in the telecommunications services industry
is intense and there are a limited number of persons with knowledge of and
experience in the industry. Locating personnel with the combination of skills
and attributes required to carry out the company's strategies is often
lengthy. Telecom Wireless' success depends to a significant degree upon its
ability to attract and retain qualified management, technical, marketing and
sales personnel. In particular, the company's success is dependent upon the
personal abilities of James C. Roberts, the company's Chairman and Chief
Executive Officer and controlling shareholder. See "Management."
24
<PAGE>
TELECOM WIRELESS COULD FACE LOSSES AND POTENTIAL LIABILITY IF INTRUSIONS,
VIRUSES OR SIMILAR DISRUPTIONS TO THE COMPANY'S NETWORK OR COMPUTER
SYSTEMS IMPEDE ITS SERVICE OR JEOPARDIZE THE COMPANY'S CONFIDENTIAL
INFORMATION OR THAT OF ITS SUBSCRIBERS
Although management has implemented, and will continue to implement,
security measures, the company's computer systems are vulnerable to computer
viruses, break-ins and similar disruptive problems caused by customers or
other users. Computer viruses, break-ins or other problems caused by third
parties could lead to interruptions, delays or cessation in service to the
company's customers. Furthermore, such inappropriate use of the Internet by
third parties could also potentially jeopardize the security of confidential
information stored in the computer systems of the company's customers. This
could, in turn, deter potential customers and adversely affect existing
customer relationships.
The security services that the company offers in connection with its
customers' networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although management will attempt to
limit contractually the company's liability in these instances, the
occurrence of security-related problems may result in claims against the
company or liability on its part. Such claims, regardless of their ultimate
outcome, could result in costly litigation and could have a material adverse
effect on the company's business or reputation or on its ability to attract
and retain customers. Moreover, until consumers trust and rely on existing
security technologies, the security and privacy concerns of existing and
potential customers may inhibit the growth of the telecommunications services
industry and the company's customer base and revenues.
MANAGEMENT MAY NOT BE AWARE OF ALL POTENTIAL LIABILITIES THAT TELECOM
WIRELESS MAY HAVE
Telecom Wireless Corporation was incorporated in 1984. The company's
management understands that Telecom Wireless was a shell corporation and that
it conducted virtually no operations for some period of time before its
acquisition of Keys Microcable Corporation in June 1998. The company's books
and records with respect to its operations before that time are incomplete.
Accordingly, the company may have liabilities relating to the period before
June 1998 of which current management has no knowledge. Currently, there are
no material liabilities of which management is aware that are not reflected
in our financial statements. If the company is faced with material
liabilities of which management was not aware and did not plan for
sufficiently, the company's financial results may suffer.
IF THE COMPANY'S SUPPLIERS FAIL TO PROVIDE THE COMPANY WITH THE EQUIPMENT
IT NEEDS, THE COMPANY MAY LOSE CUSTOMERS
There are only a limited number of businesses that can supply the
company with the key components it will need for its planned network
infrastructure, including telecommunications services and networking
equipment. The suppliers of these services and equipment also sell or lease
products and services to persons, who may be, or in the future may become,
competitors. Management cannot be certain that the company's suppliers and
telecommunications carriers will continue to sell or lease their products and
services to the company at commercially reasonable prices or at all. If there
are delays in receiving this equipment, the company may not be able to
service its customers. Difficulties in developing alternative sources of
supply, if required, could adversely affect the company's business, future
financial condition or operating results. Moreover, failure of the company's
telecommunications providers to provide the data communications capacity
required by the company for any reason could cause interruptions in the
company's ability to provide access services to its customers, which may
materially and adversely affect the company's business, financial condition
and operating results.
25
<PAGE>
TELECOM WIRELESS MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY
STANDARDS TO REMAIN COMPETITIVE
The company's market is susceptible to rapid changes due to technology
innovation, evolving industry standards, changes in customer needs and
frequent new service and product introductions. New services and products
based on new technologies or new industry standards expose Telecom Wireless
to risks of obsolete equipment. Management will need to use leading
technologies effectively, continue to develop technical expertise and enhance
existing services on a timely basis to compete successfully in this industry.
Management cannot be certain that the company will use new technologies
effectively, develop new services or enhance existing services on a timely
basis or that any new technologies or enhancements used by the company or
offered to the company's customers will achieve market acceptance.
The company's ability to compete successfully also depends on the
continued compatibility and interoperability of its services with products
and systems sold by various third parties. Although management intends to
support emerging standards in the market for Internet access and enhanced
business services, we cannot be certain that industry standards will be
established or, if they become established, that the company will be able to
conform to these new standards in a timely fashion and maintain a competitive
position in the market.
The company is also at risk due to fundamental changes in the way that
Internet access may be delivered in the future. Currently, customers access
Internet services primarily by computers connected by telephone lines.
Recently, several companies have developed cable modems, some of which are
currently offered for sale. These cable modems have the ability to transmit
data at substantially faster speeds than the modems currently used by most
Internet users. Other alternative service companies are offering various
wireless terrestrial and satellite-based service technologies, which
currently offer high-speed Internet access to business customers. As the
Internet becomes accessible by broad segments of the U.S. population through
cable modems, wireless platforms and other consumer electronic devices, or as
subscriber requirements change the means by which Internet access is
provided, the company will have to develop new technologies or modify
existing technology to accommodate these developments and remain competitive.
Management's pursuit of these technological advances may require substantial
time and expense, and we cannot be certain that we will succeed in adapting
the company's Internet access services business to alternative Internet
access devices and conduits.
IF THE INTERNET IS NOT ACCEPTED AS A VIABLE MEDIUM FOR COMMERCE, THE
COMPANY'S BUSINESS COULD SUFFER
The company's products and services are targeted toward users of the
Internet, which has experienced rapid growth. Management is not sure that the
business market will ultimately accept the Internet as a long-term means of
commerce, especially among businesses that have large investments in other
means of commerce. In addition, new technologies could be developed that may
replace the Internet as a viable means of commerce. If the market for
business-related Internet solutions fails to develop, the company's growth
would be slowed and our financial condition would suffer.
THE COMPANY FACES THE UNCERTAINTY OF SUBSCRIBER RETENTION IN THE ISP
BUSINESS
The company's sales, marketing and other costs of acquiring new
subscribers in the ISP business will be substantial relative to the monthly
fees and other revenues expected from subscribers. Accordingly, management
believes that our long-term success depends largely on our ability to retain
subscribers, while continuing to obtain new subscribers through acquisitions
and organic growth. Management expects to invest significant resources in a
national network infrastructure and customer and
26
<PAGE>
technical support capabilities to provide high levels of customer service.
Management cannot be certain that these investments will maintain or improve
subscriber retention. Management believes that intense competition from
competing ISPs, some of which offer many free hours of service or other
enticements for new subscribers will cause some of the company's future ISP
subscribers to switch to its competitors' services. In addition, some new
subscribers use the Internet only as a novelty and do not become consistent
users of Internet services and, therefore, may be more likely to discontinue
their service. These factors may adversely affect the company's subscriber
retention rates. Any decline in subscriber retention rates could have a
material adverse effect on the company's business, financial condition and
operating results.
THE COMPANY'S GROWTH PLANS DEPEND ON CORPORATE CUSTOMERS BUYING ITS
BUSINESS SERVICES
The company's operating and growth plans are based in part on
management's strategy to increase sales of the company's business services to
corporate customers. This strategy will depend significantly on the
successful development, introduction, expansion and market acceptance of the
company's business services offerings. Management cannot be certain that
additional corporate customers will purchase the company's business services
offerings or that management will successfully meet customer needs or
expectations.
REGULATION MAY INCREASE THE COST OF THE COMPANY'S SERVICES, SUBJECT THEM
TO COMPETITIVE PRESSURES OR SLOW DOWN THEIR GROWTH
Regulation could slow down the introduction of the company's
telecommunications services and increase their costs. To date, Internet
regulation and the law relating to liability of on-line service providers and
ISPs for information carried on or disseminated through their networks is
unsettled. New regulation of the Internet could increase the company's costs.
It could also slow the growth of electronic commerce on the Internet
significantly. This could delay growth in demand for the company's services
and limit its revenues.
THE COMPANY'S CLEC BUSINESS IS SUBJECT TO GOVERNMENT REGULATION
To the extent the company conducts business as a CLEC, the
telecommunications services that the company provides through its CLEC
subsidiaries will be subject to federal, state and local regulation, which
may include tariff and price listing requirements and state certification
proceedings. The company could incur substantial legal and administrative
expenses if a third party were to challenge its filed tariffs or its
subsidiaries' CLEC status. In addition, under some state statutes, changes in
the ownership of the company's outstanding voting securities also may trigger
additional state public utility commission approval.
TELECOM WIRELESS FACES A POTENTIAL CASH SHORTFALL IF IT DOES NOT ATTRACT
NEW ISP SUBSCRIBERS
Management anticipates that a portion of the company's ISP sales will
be to customers who prepay for one year of service. Management expects to
apply a substantial portion of the proceeds from these prepayments to acquire
more equipment, purchase advertising, meet current obligations and fund any
operating deficits. Management does not expect to set aside proceeds as
capital reserves to reimburse subscribers who may decide to discontinue their
service before their prepaid term expires. As a result, the company's
financial condition, including its operating results, cash flow and
liquidity, may be dependent upon increasing the number of new customers in
the current year and beyond. Any future decline in the rate of growth of new
subscribers, or any unanticipated increase in the rate of subscriber
reimbursements,
27
<PAGE>
could force management to raise additional capital to support the company's
operations by selling equity securities or incurring additional debt.
TELECOM WIRELESS DEPENDS ON THE PROTECTION OF ITS PROPRIETARY RIGHTS
Telecom Wireless will rely on a combination of copyright, trademark
and trade secret laws to protect its proprietary rights. Management cannot be
certain that the steps we, or the companies we have acquired, have taken will
be adequate to prevent the misappropriation of the company's technology or
that third parties, including competitors, will not independently develop
technologies that are substantially equivalent or superior to the company's
proprietary technology.
Management expects to obtain from various software manufacturers
either licenses or permission to use the software that we will bundle with
the company's business applications software and for the software used
internally in the company's Internet services. Although management believes
that these products will not infringe the proprietary rights of any third
parties, third parties could assert infringement claims against the company
in the future. The defense of any such claims would require the company to
incur substantial costs and would divert management's attention and
resources, which could materially and adversely affect the company's
financial condition and operations. Parties making such claims could secure a
judgment for substantial damages, as well as injunctive or equitable relief
that could effectively block the company's ability to sell its services. Any
such outcome could have a material adverse effect on the company's business,
financial condition and operating results. If a claim relating to proprietary
technology or information is asserted against the company, management may
seek licenses to use such intellectual property. Management cannot be
certain, however, that licenses could be obtained by the company on
acceptable terms, if at all.
ACQUISITIONS OF ISP SUBSCRIBERS MAY RESULT IN SUBSCRIBER CANCELLATIONS
DUE TO BILLING PROBLEMS AND UNFAMILIARITY WITH THE COMPANY'S SERVICE;
ACQUISITIONS OF COMPANIES MAY DISRUPT THE COMPANY'S BUSINESS AND DISTRACT
MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING PERSONNEL AND OPERATIONS
As part of management's growth strategy, the company may acquire
businesses, products, technologies and other assets, including ISP subscriber
accounts, or enter into joint venture arrangements, that complement the
company's businesses. In an acquisition of ISP subscribers, the company may
experience subscription cancellations in the short-term period following the
acquisition due to the lack of the acquired subscribers' familiarity with the
company as their ISP and billing issues that may arise due to poor record
keeping and billing administration by the selling company. If Telecom
Wireless acquires another company, Telecom Wireless could encounter
difficulties in assimilating the acquiree's personnel and operations. This
may disrupt the company's ongoing business and distract management, as well
as result in unanticipated costs and difficulty in maintaining the company's
standards, controls and procedures. Management cannot be certain that the
company would succeed in overcoming these risks or any other problems
encountered in connection with any acquisitions the company may make. In
addition, the company may be required to incur debt or issue equity
securities to pay for any future acquisitions or to fund any losses or
unanticipated costs of the combined companies.
THE COMPANY MAY FACE POTENTIAL LIABILITY FOR MATERIAL TRANSMITTED THROUGH
ITS NETWORK OR RETRIEVED THROUGH ITS SERVICES
The law relating to the liability of ISPs and ASPs for information
carried on or disseminated through their networks is unsettled. In addition,
the Federal Telecommunications Act of 1996 imposes fines on any entity that
knowingly permits any telecommunications facility under such entity's control
to
28
<PAGE>
be used to make obscene or indecent material available to minors via an
interactive computer service. Management cannot predict whether any claim
under this federal statute, similar state statutes or common law will be
asserted against the company, or, if asserted, whether they will be
successful. As the law in this area develops, the company may be required to
expend substantial resources or discontinue certain services to reduce its
exposure to potential liability for information carried on and disseminated
through the company's network. Any costs that the company incurs as a result
of contesting any such asserted claims or the consequent imposition of
liability could materially and adversely affect the company's business,
financial condition and operating results.
In addition, because materials may be downloaded by users of the
company's services or their customers and subsequently distributed to others,
people may make claims against the company for defamation, negligence,
copyright or trademark infringement, personal injury or other causes of
action based on the nature, content, publication and distribution of such
materials. The company also could be exposed to liability with respect to
offering third-party content that may be accessible through the company's
services, including links to web sites maintained by the company's
subscribers or other third parties, or posted directly to a web site of the
company, and subsequently retrieved by a third party through the company's
services. If any third-party content provided through the company's services
contains errors, third parties who access such material could make claims
against the company for losses incurred in reliance on such information. The
company may also offer e-mail services, which would expose the company to
other potential risks, such as liabilities or claims resulting from
unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use
of e-mail or interruptions or delays in e-mail service. Such claims, with or
without merit, likely would divert management's time and attention and result
in significant costs to investigate and defend.
THE MARKET FOR INTERNET STOCKS IS VOLATILE
The stock market in general, and the stock prices of Internet
companies in particular, have recently experienced extreme volatility that
often has been unrelated to the operating performance of any specific public
companies. If continued, these broad market and industry fluctuations may
adversely affect the trading price of Telecom Wireless' common stock,
regardless of actual operating performance.
FUTURE SALES OF TELECOM WIRELESS' COMMON STOCK INTO THE PUBLIC MARKET, OR
THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD ADVERSELY AFFECT ITS
STOCK PRICE
The market price of the company's common stock could drop if
substantial amounts of shares are sold in the public market or if the market
perceives that such sales could occur. This could also harm the company's
ability to raise additional capital by selling equity securities. As of
November 19, 1999, the company had outstanding options, warrants and
convertible securities for the purchase of up to 8,425,769 shares of common
stock at an average exercise price of $9.52 per share. The perception that
these instruments may be exercised for or converted into common stock that
could be sold into the public market could adversely affect the market price
of the company's common stock. In addition, the company has entered into
registration rights agreements with certain of our stockholders entitling
them to include their shares of common stock in registration statements for
securities filed by the company under the Securities Act of 1933, as amended.
Additionally, certain of these stockholders are entitled to require the
company to file a registration statement under the Securities Act at the
company's expense with respect to their shares of common stock. Awareness of
the existence of these registration rights could lead to a perception that
sales of the shares subject to the registration rights could occur, which
could materially and adversely affect Telecom Wireless' stock price or could
impair the company's ability to obtain capital through sales of equity
securities.
29
<PAGE>
THE COMPANY'S STOCK PRICE IS HIGHLY VOLATILE
Telecom Wireless Corporation's common stock is traded on the OTC
Bulletin Board. An active trading market for the company's common stock may
not be sustained. Historically, the market prices for securities of emerging
companies in the Internet telecommunications industry have been highly
volatile. The trading price of the company's common stock could be subject to
wide fluctuations due to such factors as quarterly variations in operating
results, competition, announcements of technological innovations or new
products by the company or its competitors, product enhancements by the
company or its competitors, regulatory changes, differences in actual results
from those expected by investors and analysts, changes in financial estimates
by securities analysts, and other events or factors.
THE COMPANY'S PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
HAVE SUBSTANTIAL INFLUENCE
James C. Roberts, Chairman and Chief Executive Officer of Telecom
Wireless, beneficially owns or controls 10,916,333 shares of the company's
common stock, representing approximately 67% of the voting power of the
company. The company's other executive officers, directors and 5% and greater
stockholders beneficially own or control, collectively, another 2,450,000
shares of the company's common stock, representing approximately 15% of the
voting power. The combined holdings of Dr. Roberts and these stockholders
account for approximately 82% of the beneficial ownership or control of the
voting power of the company's common stock. Dr. Roberts, himself, or Dr.
Roberts and these individuals acting together, are in a position to elect and
remove directors and control the outcome of most matters submitted to
stockholders for a vote. Additionally, such persons would be able to
influence significantly a proposed amendment to the company's charter, a
merger proposal, a proposed sale of assets or other major corporate
transaction or a non-negotiated takeover attempt. Such concentration of
ownership may discourage a potential acquiror from making an offer to buy the
company, which, in turn, could adversely affect the market price of Telecom
Wireless' common stock.
TELECOM WIRELESS IS SUBJECT TO RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. Confusion of dates may bring about
system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar business activities. As a result, many
companies' software and computer systems need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. Management has
established procedures for evaluating and managing the risks and costs
associated with this problem and currently expects that the company's
computer systems will be Year 2000 compliant by December 15, 1999. However,
some of the company's customers may maintain their operations on commercially
available operating systems, which may be impacted by Year 2000
complications. In addition, Telecom Wireless relies on third-party vendors
for certain telecommunications and information systems equipment and software
included within its services that may not be Year 2000 compliant. The failure
of the company's internal computer systems or of third-party equipment or
software to operate without Year 2000 complications could require Telecom
Wireless to incur significant unanticipated expenses to remedy any problems
and could expose the company to claims for losses incurred by the company's
users due to Year 2000 complications. The defense of any such claims, with or
without merit, could require Telecom Wireless to incur substantial costs and
would divert management's time and attention, which could have a material
adverse effect on its business, financial condition and operating results. In
addition, Telecom Wireless is subject to external forces that might generally
affect
30
<PAGE>
industry and commerce, such as utility company Year 2000 compliance failures
and related service interruptions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
This registration statement contains both historical and
forward-looking statements. All statements other than statements of
historical fact are, or may be deemed to be, forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. The forward-looking statements in
this registration statement are not based on historical facts, but rather
reflect the current expectations of the management of Telecom Wireless
Corporation concerning future results and events.
The forward-looking statements generally can be identified by the use
of terms such as "believe," "expect," "anticipate," "intend," "plan,"
"foresee," "likely," "will" or other similar words or phrases. Similarly,
statements that describe the objectives, plans or goals of Telecom Wireless
are or may be forward-looking statements.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of Telecom Wireless to be different from any
future results, performance and achievements expressed or implied by these
statements. You should review carefully all information, including the
financial statements and the notes to the financial statements included in
this registration statement. In addition to the factors discussed above under
"Risk Factors," the following important factors could affect future results,
causing the results to differ materially from those expressed in the
forward-looking statements in this registration statement:
- the timing, impact and other uncertainties related to pending and
future acquisitions by Telecom Wireless;
- the impact of new technologies;
- changes in laws or rules or regulations of a governmental agency,
including the Federal Communications Commission;
- changes in tax requirements, including tax rate changes, new tax
laws and revised tax law interpretations; and
- interest rate fluctuations and other capital market conditions.
These factors are not necessarily all of the important factors that
could cause actual results to differ materially from those expressed in the
forward-looking statements in this registration statement. Other unknown or
unpredictable factors also could have material adverse effects on the future
results of Telecom Wireless. The forward-looking statements in this
registration statement are made only as of the date of this registration
statement and, under Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, Telecom Wireless Corporation does
not have any obligation to publicly update any forward-looking statements to
reflect subsequent events or circumstances. Telecom Wireless cannot assure
you that projected results will be achieved.
31
<PAGE>
OVERVIEW
The goal of Telecom Wireless Corporation is to become a leading
consolidator of the highly fragmented ISP, ASP, and CLEC industries through
an aggressive acquisition strategy. Reductions in operating costs are
expected to be achieved through integration of the operations and systems of
acquired businesses, including centralization of billing, customer support
services, marketing and advertising. Revenues per subscriber are expected to
be increased by making available to customers enhanced Internet products and
services. The company will attempt to reduce customer turnover, or "churn,"
by maintaining a local presence for acquired businesses.
The company currently operates an ISP, an ASP and a wireless cable
television company. Management believes this mix of technologies and markets
will provide the platform on which to validate planned new product offerings
and market assumptions.
BUSINESS PLAN
ACQUIRING AND CONSOLIDATING INDEPENDENT TELECOMMUNICATIONS BUSINESSES.
We expect to acquire businesses that will enable us to provide a
comprehensive range of telecommunications products and services. Although we
expect most businesses will be profitable, the implementation of new services
will require substantial expenditures for equipment in the field. This
generally will result in negative cash flow for at least the first year of
operations for each acquisition.
STANDARDIZING AND CENTRALIZING OPERATIONS TO CAPTURE EFFICIENCIES OF
SCALE.
LOCAL PRESENCE. Telecom Wireless will attempt to retain key employees
of acquired companies to ensure a smooth transition and maintain local
institutional knowledge. This will be important, as the local operating
units will be required to maintain local presence as the Company develops a
national brand. We believe that consolidation efforts by national ISPs have
been seriously flawed by a lack of sensitivity to the essentially local
nature of the ISP business. This has resulted in sharply increased
subscriber churn rates (post acquisition) and subsequent loss of revenue.
Our integration and consolidation efforts will be structured to retain the
perception by subscribers that their ISP is a local business providing
superior service to that of national services.
INTEGRATION TEAMS. To help integrate operations the company will
establish integration teams. Each integration team will consist of skilled
technical and marketing personnel. The integration team will have the
responsibility to help with the overall centralization, standardization, and
eventual branding of the local company as a part of the TWC network.
Additionally the company's accounting staff will work with the integration
team to centralize the accounting and billing systems promptly upon closing
of the acquisition. Upon completion of the initial integration process, the
operating units will begin executing the marketing and branding programs
established by the company to expand its customer base and improve its
customer retention.
CONSOLIDATION OF FUNCTIONS. The two major expenses associated with
all ISP and CLEC operations are administrative (primarily personnel) and
technical (including upstream telecommunications and LAN). These factors
interact with administrative elements common to all ISPs including
accounting, system administration, web hosting and design, telephone and
technical support. To the extent these common elements are consolidated and
standardized, significant savings will be recognized.
32
<PAGE>
- ACCOUNTING: A high priority for the company is the installation of
a common accounting platform across all ISPs. Management
currently is evaluating accounting and billing platforms. The
selected platform will be flexible enough to include on one bill
all products and services we may choose to offer in the future and
be scalable to include any number of subscribers.
- TECHNICAL SUPPORT: The Company plans to maintain regional
telephone technical support centers to handle all consumer
problems, service inquiries and new subscriptions. Such centers
will reduce the need for support staff at each location and
improve service.
- WEB DESIGN AND STORAGE: It is our goal to transfer all ISP web
design, maintenance and hosting to our ASP division. Such a
strategy should eliminate the need for programmers at each local
ISP.
- SYSTEMS ADMINISTRATION: Consolidation of telecommunications is a
challenging goal because of the number of factors that must be
considered for each acquisition. Prior to acquisition, each ISP
maintains its own modem banks, LAN, and routing to the Internet.
Platforms range from UNIX to NT to others. In addition, each ISP
may have its own upstream Internet Service Provider as well as an
LEC. The company will use care and caution so that the quality of
service is not jeopardized while consolidation is implemented.
IMMEDIATELY BUNDLING VIDEO, VOICE, AND DATA PRODUCTS AND SERVICES.
Increasingly, businesses and consumers are drawn to ISPs that can meet all of
their telecommunications needs. Bundling services provides the ability to
become a "one stop shop" for all customers' needs. We expect bundling to
assist us in retaining existing customers and attracting additional customers.
DEVELOPING AND OFFERING VALUE-ADDED PRODUCTS AND SERVICES. In some
segments of the telecommunications business, the ability to offer value-added
products and services provides a tremendous competitive advantage. By
delivering value-added services, Telecom Wireless will attract and retain
customers. A typical example of a value-added service is Voice over Internet
Protocol (VoIP). By installing new hardware that supports not only this
service but the traditional ISP services, TWC will be able to begin offering
this service to the existing subscribers of the acquired ISP's and CLEC's.
UNIFIED BRANDING. We intend to use the same brand name in marketing
our products and services. Unified branding should solidify our customer
base, ensure customer loyalty, help us to gain market share and enable us to
benefit from the efficiencies of centralization. In addition, it should
enhance our market visibility and perception. Branding also should enhance
our ability to sell additional products and services. In addition, past
industry experience indicates that unified branding should significantly
reduce customer churn.
The ability of Telecom Wireless to remain in business and implement
its business plan depends upon a variety of factors, primarily financing and
the ability to attract and retain employees having the necessary skills.
Funding operations and acquisitions has been and is expected to continue to
be the major impediment to implement its business plan. We need capital to
sustain operations and to consummate acquisitions. Management can give no
assurance that the company's capital requirements can be satisfied at all or
on reasonable terms.
33
<PAGE>
COMBINED RESULTS OF OPERATIONS
REVENUES. Telecom Wireless Corporation and its subsidiaries
historically have derived their revenues primarily from subscription fees
paid by ISP subscribers for dial-up access to the Internet, consulting fees,
fees paid for ASP services, and subscription fees paid for wireless cable
television access. ISP subscription fees vary by the billing plan within the
subscriber base. The vast majority of the plans in effect are monthly.
However, there is a growing acceptance of annual contracts that offer a
discount over the monthly fee.
ASP customers will be expected to enter into relatively long-term
contracts. Additional revenues are generated by the customization of
applications to meet the customers' specific requirements.
Wireless cable television subscribers pay monthly cable access fees.
Like ISP subscribers, wireless cable television subscribers pay fees based on
the billing plan they have selected.
COSTS. Our direct costs of sales with respect to ISP and wireless
cable television revenues consist primarily of maintaining sufficient
capacity to provide services to our subscribers. Capacity is a measurement
of the provider's ability to connect subscribers. ISP capacity costs include:
- the cost of leased routers and access servers and recurring
telecommunications costs, including the cost of local telephone
- lines to carry subscriber calls to our points of presence, or
"POPs";
- the costs associated with leased lines connecting our POPs
directly to the Internet or to operations centers and connecting
operations centers to the Internet; and
- Internet backbone costs, which are the amounts paid to Internet
backbone providers for bandwidth, which allows transmission of
data from the Internet to subscribers.
Cost of ISP sales revenues will increase as required to support a
growing subscriber base. We will seek to leverage the combined scale of our
ISPs to lower telecommunications costs as a percentage of revenues by:
- negotiating one or more relationships with national backbone
providers to connect our ISPs to the Internet;
- negotiating favorable local loop contracts and establishing
co-location arrangements with local exchange carriers;
- establishing private peering relationships to reduce our costs and
improve access and reliability for our subscribers;
- negotiating discounts with equipment vendors; and
- implementing wireless technology to provide high speed Internet
access to the small office/home office market. The wireless
technology will allow high-speed access at costs less than
reselling the lines from the existing local exchange carriers.
34
<PAGE>
Costs of ASP revenues consist primarily of:
- salaries and benefits of the personnel providing services;
- technical services; and
- purchase or lease of equipment required to provide the services.
Costs of sales of wireless cable television revenues consist primarily
of:
- content costs;
- frequency license leases;
- technician labor costs; and
- purchase or lease of equipment necessary for the receiving and
retransmission of programming.
General, administrative and other expenses consist primarily of:
- the salaries of our non-technician employees and associated
benefits; and
- the cost of selling, marketing, accounting and legal services
related to merger and acquisition activities.
General, administrative and other expenses include expenses associated
with customer service and technical support, primarily salaries and
employment costs. We expect operations and customer support expenses to
increase in the short term to support new and existing subscribers. New
subscribers tend to have particularly heavy customer service and technical
support requirements. Because we anticipate growth in our subscriber base, we
expect these costs to comprise an increasing percentage of expenses in the
near term. In addition, providing customer service and technical support 24
hours a day, seven days a week in our markets will increase these expenses on
an absolute basis. In the longer term, as a percentage of revenues, we
believe operations and customer support expenses should decline as the
existing subscriber base becomes less dependent on customer service, and due
to increased operating efficiencies. The consolidation of the help desk and
customer support functions will also offset increased costs caused by
increased demand.
General, administrative and other expenses also include the expenses
associated with acquiring subscribers, including salaries, bonuses, sales
commissions, advertising and referral bonuses. We expect ISP sales and
marketing expense to increase over time with the growth in our ISP subscriber
base. On a percentage of revenue basis, sales and marketing expense is a
relatively variable cost and may increase with our development of unified
branding.
In addition, general, administrative and other expense includes
internal and external merger and acquisition costs such as salaries, bonuses,
commissions and accounting, legal and other professional fees. We expect to
reduce merger and acquisition expenses as a percentage of revenues of
acquired businesses through standardization of procedures and documents.
35
<PAGE>
We expect general, administrative and other costs to increase to
support our growth, particularly as we establish a network operations center
and implement common billing and financial reporting systems in the near
term. Over time, we expect these relatively fixed expenses to decrease as a
percentage of revenues. Additionally as a result of consolidation of the
traditional back office activities such as help desk, technical support, and
centralized billing we anticipate the reduction of labor costs for our
acquisitions. However, we will incur substantial costs and expenses in
connection with our integration and consolidation efforts, including
salaries, travel, software and equipment.
Amortization expense primarily relates, on a pro forma basis, to the
amortization of goodwill and subscriber lists acquired in business
acquisitions. We expect amortization expense to increase as additional
acquisitions are closed and to vary according to the purchase price and
tangible assets involved in the acquisition. Our policy is to amortize the
portion of the acquisition purchase price attributable to subscriber lists,
goodwill and other intangible assets over three to five years. This
amortization will reduce income. Therefore, as we expand our subscriber base
through acquisitions, we will experience increasing amortization expense.
Depreciation primarily relates to our technology and office equipment
and is provided over the estimated useful lives of the assets ranging from
three to nine years using the straight-line method. We expect depreciation
expense to increase as we grow our networks to support new and acquired
subscribers and as we build a network operations center and implement common
billing and reporting systems.
Operating results in the future may fluctuate significantly depending
upon a variety of factors, including capital costs and costs associated with
the introduction of new products and services. Additional factors that may
cause operating results to vary include:
- the pricing and mix of services provided;
- subscriber retention rates;
- changes in pricing policies and product offerings by competitors;
- demand for Internet access services;
- one-time costs associated with acquisitions; and
- general telecommunications services, performance and availability.
On a pro forma basis, we have experienced seasonal variation in
Internet and wireless cable television use in Florida, and revenue streams
have fluctuated. As a result, variations in the timing and amounts of
revenues could have a material adverse effect on our operating results.
Based on the foregoing factors, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful and that these
comparisons cannot be relied upon as indicators of future performance.
DISCUSSION OF THE OPERATIONS OF TELECOM WIRELESS CORPORATION
During the fiscal quarter ended June 30, 1999, present management
assumed control of the company and started to plan, document and implement
its merger and acquisition (M&A) activities. During that and the following
fiscal quarter, substantial time, effort and money were expended to develop
and document M&A due diligence and acquisition forms, documents and
procedures. At the same time,
36
<PAGE>
field personnel were actively seeking letters of intent from acquisition
targets. The initial M&A sales and marketing team has been expanded from two
senior managers and one support person to include two more in sales and two
in operations.
The company has engaged independent legal counsel experienced in
Internet and telecommunications transactions to prepare standard form
documents and due diligence procedures. Such legal counsel also conducts the
legal (as opposed to financial and operational) due diligence, assists in the
negotiation of, and prepares, definitive agreements, and prepares closing
documents. To facilitate the acquisition process, the company generally
agrees to pay the cost of obtaining audit reports and opinions for target
companies. Such audits are performed either by the company's independent
accountants or by other auditors engaged by the company.
Between April and September 1999 the company entered into non-binding
letters of intent to acquire approximately 19 companies, and definitive
agreements for the acquisition of an additional five companies. Due to the
lack of acquisition funds, none of these transactions closed except America's
Web Station, Inc., and Prentice Technologies, Inc., which were acquisitions
largely for the company's common stock.
If justified by the volume of acquisitions and subject to the
availability of capital, the company plans to expand its legal and accounting
departments to reduce the substantial expense for outside attorneys and
auditors. As the company grows, its need for audited financial statements of
acquired businesses may, in many cases, be deferred to a point in time
subsequent to closing of the acquisition. In addition, the company will
proceed with two types of acquisitions. One will be smaller companies which
may not require audited financial statements. These companies will be
offered standard acquisition terms with little or no negotiation. Management
believes such acquisitions will be possible at substantially reduced costs.
The other type of acquisition will be the larger and/or more complex
companies where specialized documents and procedures may be required. This
type of transaction will continue to be largely handled by the outside
attorneys and accountants.
For the years ended June 30, 1998 and 1999, Telecom Wireless had
revenues of $45,000 and $517,000, respectively. For the three months ended
September 30, 1998, and 1999, revenues were $144,000 and $171,000,
respectively. The primary source of its operating revenues for these periods
was the wireless cable TV operations of Keys Microcable Corporation, a
wholly-owned subsidiary of the company. Costs incurred resulted in losses
from operations by Keys Microcable of $1,031,000 for the year ended June 30,
1999, and $348,000 for the three months ended September 30, 1999.
Financial information for Keys Microcable for the period ended June
30, 1998, reflect one month of operations, beginning at the time Telecom
Wireless acquired that entity. Currently, wireless cable television services
are not part of our strategic plan as the small market in the Key West area
limits the value of this subsidiary. However, Keys Microcable does provide a
platform from which we will be able to test technical, administrative and
marketing plans. By utilizing its MMDS radio frequencies, we are planning to
offer wireless high-speed Internet access to residential and business
customers, market web site development and hosting services, and an improved
billing system. To improve the marketability of Keys Microcable, the company
is making investments in equipment and subscriber services.
For the year ended June 30, 1999, and the quarter ended September 30,
1999, the company incurred approximately $177,000 and 730,000, respectively,
in M&A-related expenses for outside legal and accounting fees and costs.
Approximately $392,000 of direct external costs as of September 30, 1999, for
accounting, legal and engineering work was classified as deferred acquisition
costs as management believes the acquisition of the companies with respect to
which the costs were incurred are likely to occur if the company obtains
adequate funding for that purpose. Management expects that the
37
<PAGE>
level of M&A costs will decrease with the addition of internal resources to
replace more costly outside professional services.
To fully implement its business plan, the company will be required to
acquire or build a national infrastructure and establish and train
integration and consolidation teams. Since the company has made few
acquisitions, the staff presently required to manage integration and
consolidation is minimal. However, management anticipates that, during the
third and fourth quarters of the current fiscal year, significant additional
investment in technical and integration personnel will be required.
DISCUSSION OF THE OPERATIONS OF KEYS MICROCABLE CORPORATION
Keys Microcable Corporation, a Florida Corporation, provides wireless
cable television services in Key West, Florida. Television programming
received from satellites is retransmitted to residential, business, and
maritime subscribers in the Key West geographic area. The signals are
transmitted from a single transmitter location (head end) and are received by
small antennas that are installed by Keys Microcable at each subscriber
location. Typically, each subscriber location services a single residence or
business. There are locations however, such as hotels, condominium
associations and marinas that service multiple subscribers from a single
antenna. At some of these locations additional equipment such as signal
amplifiers and splitters are required.
When current management assumed control of Telecom Wireless in April
1999, KMC was in a state of decline and disarray caused by lack of capital
which hindered operations as well as growth. Non-payment of fees had
resulted in cancellation of several popular channels of programming. Many
other programmers were threatening to terminate service. In addition, there
were several claims pending against KMC.
During fiscal 1999 and the three month period ending September 30,
1999 the following actions were taken to reverse the financial and
operational conditions of KMC:
- All claims were settled for $159,000 except a lawsuit arising from
a traffic accident which is currently being settled by our
insurance carrier.
- More favorable payment terms have been renegotiated with key
suppliers of services and programming content.
- Overall overdue payables (greater than 90 days) have been reduced
by $130,000.
- Settlement negotiations are underway with an equipment supplier to
return equipment that was received but is not in use.
- Management anticipates a credit of $170,000 that will further
reduce overdue payables.
Investments in capital equipment and maintenance programs to improve
signal quality and programming content were also made. These investments
have resulted in a significant increase in customer satisfaction based on
surveys of the subscribers. Investments included enhanced power back up
equipment as well as increased levels of maintenance spares.
Investments were made to increase sales staff and local advertising
programs. Since April 1999 the number of equivalent billing unit subscribers
has increased by over 13% and the number of premium channel subscriptions has
increased over 100%. Increased marketing to developers of new commercial
38
<PAGE>
properties and government agencies could substantially increase the total
subscriber count by the end of the current fiscal year.
KMC provides the Company with a wireless platform on which to add
additional "bundled" services such as Internet access and Voice over Internet
Protocol (VoIP) services. To offer wireless two way high speed Internet
access will require a significant capital investment. This investment may be
as high as $300,000 in capital equipment costs in the second and third fiscal
quarters with $5,000 per month in recurring monthly costs. This new service
along with web site design and hosting (to be done by our ASP division) is
anticipated to generate incremental annual revenues in excess of $240,000.
DISCUSSION OF AMERICA'S WEB STATION, INC. OPERATIONS
America's Web Station, Inc., was founded in January 1997 to provide
Internet solutions to the rapidly expanding small to medium size business
market in southwest Florida. The initial focus was on high-end
database-driven web sites and e-commerce solutions. Internet access
(dial-up) and web site hosting for businesses subsequently was added. In the
first quarter of 1998, AWS began offering residential Internet service.
Revenues increased from $47,000 for the year ended December 31, 1997, to
$171,000 for the following fiscal year. However, for the same periods,
general and administrative expenses increased from $102,000 to $283,000 due
to hardware/software purchases and payroll for additional staff.
For the six months ended June 30, 1999, revenue decreased to $77,000
from $88,000 for the same period in the preceding year primarily due to the
time and effort required of AWS management to negotiate, document and close
its acquisition by the company in July 1999. However, during the same
periods, general and administrative expenses decreased from $134,000 to
$82,000 due to final payment of equipment leases and staff reorganization.
Since the acquisition, hardware and software have been expanded and
upgraded and new sales and marketing staff have been hired. The staff has
been undergoing training with respect to new products and services. Also,
AWS has implemented a marketing campaign that management believes has been
favorably received by the local business community. At September 30, 1999,
AWS had 276 Internet access subscribers and 53 web site hosting customers.
Management also believes AWS will achieve profitability during the
fiscal year ending June 30, 2000. By utilizing the resources in the
company's ASP Division for the web site design and hosting, the operating
costs and capital requirements of AWS are expected to decrease.
DISCUSSION OF PRENTICE OPERATIONS
Sys-Group, Inc., dba Prentice Technologies, Inc., is an Enterprise
Application Service Provider. Founded in January 1994, it provides high-tech
consultation, specializing in rapid prototyping, performance-enhancing tools,
and administration of enterprise software provided by its primary business
partner, J.D. Edwards & Company. Prentice is positioning itself to enter
the rapidly expending market place of Application Service Providers.
Rapid technological change, coupled with new practices in the
information technology field, have created an opportunity. Instead of
creating an expensive in-house IT infrastructure that requires maintenance
and upgrading on a regular basis, a growing number of corporations are
outsourcing its IT functions. These functions are provided from a central
network location which is operated and maintained by experienced IT
professionals. The application services are delivered on-line, via
high-
39
<PAGE>
speed communication networks and are paid for on a subscription basis. The
subscriber can lease the service under a long-term contract or rent them on a
month-to-month basis.
In September 1999, Telecom Wireless acquired 90% of the outstanding
capital stock of Prentice in a stock-for-stock reorganization. The value
placed upon the acquisition was $3,503,753 ($2,680,419 for accounting
purposes), of which $3,250,003 ($2,426,669 for accounting purposes) was in
the form of 346,667 shares of the restricted common stock of Telecom Wireless
valued at $9.375 ($7.00 for accounting purposes) per share and $253,750 was
in the form of a 180-day promissory note.
Prentice has used a combination of cash flow from operations and
various credit facilities to satisfy its cash requirements. Prentice has a
$75,000 line-of-credit with interest at 2.9% over prime (totaling 10.7% at
June 30, 1999). The line has no stated maturity and is personally guaranteed
by the minority shareholder. At December 31, 1998 and June 30, 1999, $70,000
and $63,000, respectively, was borrowed against the line. In 1999, the
Company entered into a factoring agreement secured by inventory, equipment,
accounts receivables and intangible assets. The finance company advances 80%
of eligible accounts receivable and remits the remaining 20%, less interest
and fees, when the account is paid by the customer. Proceeds from the
finance company during the six months ended June 30, 1999 were approximately
$608,000. Fees and interest paid for the six months ended June 30, 1999 were
approximately $14,000. The Company is at risk for the credit losses
associated with sold receivables. In addition, the minority shareholder of
Prentice has provided interest free loans. Prentice also leases computer
equipment and office furniture under capital leases with monthly payments
ranging from $253 to $1,880 and interest rates ranging from 9.4% to 21.5% per
year. The leases have been personally guaranteed by the minority shareholder.
Revenues increased from $385,000 for the year ended December 31, 1997,
to $1,200,000 for the year ended December 31, 1998. Revenues increased from
$457,000 for the six months ended June 30, 1998, to $1,251,000 for the six
months ended June 30, 1999. Prentice continues to have certain customers
which account for the majority of its revenue - see note 8 to financial
statements for Sys-Group, Inc., dba Prentice Technologies, Inc. Gross profit
and direct expenses for the periods indicated above increased in proportion
to the consulting income.
General, administrative and selling expenses increased from $71,000
for the year ended December 31, 1997, to $304,000 for the year ended December
31, 1998. General, administrative and selling expenses increased from
$130,000 for the six months ended June 30, 1998, to $392,000 for the six
months ended June 30, 1999. These increases were due to increased staffing
and operational expenses to support the increase in consulting income.
In July 1999, Prentice invested in its core management team by hiring
a Vice President and General Manager, a Vice President of Sales, a Director
of Consulting and a Director of Marketing. Prentice anticipates that it will
have an operating deficit due to the enlargement of its management team and
the cost of implementing its growth plans. These plans include:
- The rollout of ASP services, which will include sales and
marketing campaigns.
- Continued growth of our consulting services group, expanding into
application services.
- Expansion of our collocation Data Center facility, located at
Level(3) Communications, to house equipment for ASP clients.
40
<PAGE>
- Build out of the planned Network Operations Center, which will
monitor the Data Center and house employees.
- Build out of the corporate offices in Denver and satellite offices
in Minneapolis and Chicago.
To offer its ASP services, Prentice will have to continue to obtain
lease financing for the computer equipment and software required to provide
these services. Management estimates that ASP sales will require lease
financing representing approximately 25% of its ASP sales. To meet future
financing needs, Prentice plans to secure a bank line-of-credit to pay off
the factoring agreement and support operational cash flow needs and will seek
mezzanine financing.
Prior to its acquisition by Telecom Wireless, Prentice obtained lease
financing based upon its operational history and capabilities, and the
personal guarantee of Shawn Richmond, its then sole shareholder. Subsequent
to the acquisition, the financial position and other factors relating to
Telecom Wireless have made it difficult for Prentice to raise additional to
support expanding operations.
By letter dated November 16, 1999, Shawn P. Richmond, through his
attorney, seeks rescission of his sale of 90% of the common stock of Prentice
to the company. See "Part I, Item 1. Description of Business --
Acquisitions."
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a pro forma combined basis, Telecom Wireless had a negative cash
flow from operations of $1,596,000 and $1,442,000 for the 12 months ended
June 30, 1999, and the three months ended September 30, 1999, respectively.
Cash flow used in investing activities was primarily for the purchase of
equipment and acquisition costs. Cash flow generated by financing activities
was primarily from the issuance of stock and short-term debt. Substantial
additional cash will be required to implement our business plan.
Since April 1999, we have funded our operations and working capital
needs primarily through private placement of the company's equity securities
and short-term debt instruments and through lease financing. See note 12 to
the consolidated financial statements of Telecom Wireless Corporation.
The company also entered into a Master Lease Agreement dated as of
July 30, 1999, with the Internet Working Division of Lucent Technologies
Inc., as lessor. Subject to certain conditions, the Lessor has agreed to
provide telecommunications and other equipment to the company and its
subsidiaries having a maximum aggregate purchase price of $20,000,000. The
company may lease equipment with a value of up to $5,000,000 without having
to satisfy certain covenants and financial ratios. To date, the company has
leased equipment having a value of approximately $1.2 million. Most of the
equipment presently is in storage in Albuquerque, New Mexico. Lease payments
for the rental of this equipment aggregating approximately $46,000 per month
will commence in November 1999. The Master Lease Agreement meets the
requirements of an operating lease for accounting purposes.
When present management assumed control of the company in mid-April,
1999, the market for Internet and Internet-related stocks was strong.
However, beginning in July 1999, the market for such securities weakened, and
the market prices for many Internet stocks fell by 50% or more. As a result,
it has become increasingly difficult for the company to obtain financing,
either debt or equity, to fund operations or acquisitions. This has forced
the company to obtain high cost short-term financing to cover operating
expenses and to delay closings of acquisitions.
41
<PAGE>
The company has adopted a three-pronged financing plan:
- Seek mergers, joint ventures or financing arrangements with larger
private or public ISPs and other entities. These entities may
have ISP operational infrastructures already in place and/or may
require a source of acquisitions.
- Seek short- and long-term financing through private placements of
debt and equity securities in the capital markets. If possible,
the company will seek to finance its longer term requirements with
debt rather than equity so as to reduce dilution to stockholders
of Telecom Wireless.
- Mount an aggressive campaign to acquire companies for cash, if
available, and otherwise for registered Telecom Wireless common
stock. This will require substantial working capital to fund
operating and merger and acquisition expenses and to pay the
significant cost of compliance with applicable securities laws.
There can be no assurance that financing will be available in amounts
or on terms acceptable to Telecom Wireless, if at all. Should the company be
unsuccessful in its efforts to raise capital, it may be required to curtail
operations.
YEAR 2000 READINESS
Year 2000 readiness is the result of computer programs using two
digits rather than four to define the applicable year. As a result, date
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculation
causing disruptions of operations. We have received representations from
each company we have acquired and expect to acquire that it does not face
material unresolved year 2000 issues. To the extent these representations
are breached and we suffer damages, our operating results and financial
condition may be adversely affected.
We have also contacted each of these companies to determine its Year
2000 readiness. None of them expect significant Year 2000 problems. We have
conducted limited tests regarding Year 2000 readiness and have not located
any material deficiencies. To a limited extent, these companies also have
contacted their major vendors to assess their Year 2000 readiness. Any
failure by these vendors or service providers to resolve any Year 2000 issues
on a timely basis or in a manner that is compatible with the systems of our
subsidiaries could adversely affect our ability to provide services to ISP
subscribers and ASP customers. We do not have any contingency plans for
handling Year 2000 problems that are not detected and corrected prior to
their occurrence.
Based upon current information, we do not anticipate costs associated
with the Year 2000 issue to have a material financial impact on us. However,
our expectations are limited by uncertainties that could cause actual results
to have a greater financial impact than currently anticipated. Moreover, as
stated above our Year 2000 examination of companies acquired and to be
acquired has been limited and their investigations of Year 2000 readiness by
their suppliers and vendors likewise has been limited.
ITEM 3. DESCRIPTION OF PROPERTY
Telecom Wireless's principal executive offices are located in
approximately 15,598 square feet of leased space at 5299 DTC Boulevard, Suite
1200, Englewood, Colorado 80111, which it shares with Prentice Technologies,
Inc., a subsidiary of the company. The current monthly lease payment is
$15,598 for the entire space. The lease expires in 2002.
42
<PAGE>
The company also has a lease for office space in West Palm Beach,
Florida covering approximately 7,439 square feet. The lease expires August
1, 2004. The monthly lease payment is approximately $8,369. Due to a change
in the company's business plan, it has advised the landlord that it does not
intend to occupy the premises and the landlord has declared the company to be
in default under the lease. Telecom Wireless may be liable to the landlord
for the amount of unpaid rent under the lease.
America's Web Station, Inc., a subsidiary of the company, operates out
of 1,584 square feet of leased space in Naples, Florida. The company's Keys
Microcable subsidiary is headquartered in leased space in Key West, Florida,
where it also leases land for an unmanned "head end" facility containing
electronic equipment.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of November 19,
1999 with respect to each person who owned of record as of that date or is
known to the company to own beneficially more than 5% of the outstanding
shares of common stock and the beneficial ownership of such securities by
each executive officer and director of the company and by all the executive
officers and directors as a group:
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Amount and Nature of
Positions and Beneficial Common Percent of
Name and Address Offices Held Stock Ownership Class
- ---------------- ------------- -------------------- ----------
<S> <C> <C> <C>
James C. Roberts Chief Executive 10,916,333(1) 66.5%
5299 DTC Blvd., #1200 Officer,
Englewood, CO 80111 Chairman of the Board
of Directors and
Director
Calvin D. Smiley President and 100,000 0.6%
5299 DTC Blvd., #1200 Director
Englewood, CO 80111
Kosta S. Kovachev Executive Vice 750,000 4.6%
580 Village Blvd., #140 President,
West Palm Beach, FL 33409 Chief Financial
Officer and
Director
Robert L. Fredrick Senior Vice President 500,000 3.0%
580 Village Blvd., #140
West Palm Beach, FL 33409
Shawn P. Richmond Vice President-ASP 100,000 0.6%
5299 DTC Blvd., #1200 Development and
Englewood, CO 80111 President, Prentice
Technologies, Inc.
Allen Leeds Vice President- 1,000,000 6.1%
108 17th Street International
Bellair Beach, FL 34635 Operations
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Amount and Nature of
Positions and Beneficial Common Percent of
Name and Address Offices Held Stock Ownership Class
- ---------------- ------------- -------------------- ----------
<S> <C> <C> <C>
All executive officers and 12,366,333 75.3%
directors of the company as
a group (five persons)
</TABLE>
(1) Of the shares beneficially owned by Dr. Roberts, 10,616,333 are owned of
record by The Roberts Family Trust, of which Dr. Roberts and Lynne K.
Roberts, his spouse, are sole trustees, and 300,000 are owned of record
by Mrs. Roberts.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following paragraphs identify the directors and executive officers
of Telecom Wireless and describe their business experience:
JAMES C. ROBERTS, 46, has served as Chief Executive Officer, Chairman
of the Board of Directors and a director of Telecom Wireless since April
1999. Dr. Roberts co-founded and served as President, Chief Operating Officer
and a director of Voice and Data Communications, Inc., Greenwich,
Connecticut, an international long distance company servicing Asia, America,
Europe and Latin America, from March 1998 to November 1998. Previous to that,
he served as President and Chief Executive Officer of CGI Worldwide, Inc.
from its inception in 1986 until 1997. CGI was a multifaceted
telecommunications company that designed, engineered, constructed and
developed over 80 cellular, paging and cable television systems around the
world. Before joining CGI, Dr. Roberts spent over ten years in the
telecommunications business, holding senior management positions with McCaw
Cellular Communications, Inc., MCI Communications Corp. and Motorola, Inc.
During this period, Dr. Roberts was responsible for building and operating
over 50 cellular, paging and cable TV systems. Dr. Roberts was a charter
member of the Cellular Telephone Industry Association. He holds several
university degrees including a doctoral degree in business administration
with emphasis in International Economics from NewPort University, Newport
Beach, California, which was conferred in 1992.
CALVIN D. SMILEY, 46, has served as an officer and director of Telecom
Wireless since April 1999. In October 1999, he was elected President of the
company. From March 1997 to March 1999, Mr. Smiley was President of
Communicast, Inc., a turn-key advertising sales company representing the
wireless and cable television industries based in Denver, Colorado. From
September 1995 to February 1997, he served as Chief Operating Officer and
Executive Vice President for Across Media Networks, LLC, Denver, Colorado, a
photo digital classified advertising company. Before joining Across Media,
Mr. Smiley was President of Act One Cable Television Advertising, Inc. and
Cable Advertising Networks, Inc., both advertising and marketing companies
based in Columbus, Ohio, serving rural cable operators. For fourteen years
before September 1995, Mr. Smiley held several management and executive
positions with TeleCommunication, Inc. in advertising sales and marketing. He
held various positions in radio and television before joining TCI.
KOSTA S. KOVACHEV, 48, has been Executive Vice President, Chief
Financial Officer and a director of Telecom Wireless since April 1999. From
January 1997 to February 1999, Mr. Kovachev served as a director of Alma Fund
Group, a global venture capital firm that he co-founded. From April
44
<PAGE>
1996 to January 1997, Mr. Kovachev was a Managing Director of Gem Advisors,
Inc., a venture capital firm that specialized in private placements of funds.
From September 1995 to March 1996, Mr. Kovachev was Managing Director of
W.G. Trading, a convertible sales and trading firm. From April 1994 to August
1995, Mr. Kovachev was Senior Portfolio Director for the Palladin Group, an
investment fund management firm, where he headed the firm's international
funds area. Mr. Kovachev was Managing Director and head of the international
convertible desk at McMahan Securities, a fund management and broker/dealer
firm, from 1992 to 1994. Mr. Kovachev was employed by Morgan Stanley from
1987 to 1992 where he was promoted to Vice President in International
Convertible Sales. Mr. Kovachev's experience with Wall Street firms includes
employment by Morgan Stanley, Drexel Burnham Lambert and Arnhold & S.
Bleichroeder.
ROBERT L. FREDRICK, 54, has served as an officer and director of
Telecom Wireless since April 1999 and, in October 1999, was elected to the
position of Senior Vice President. He also serves as President of Keys
Microcable Corporation, a wholly owned subsidiary of Telecom Wireless. Keys
Microcable provides wireless television programming in Monroe County,
Florida. Before joining Keys Microcable, Mr. Fredrick was President of
Strategic Solutions Group Inc. from 1994 to 1998. Strategic Solutions Group
provided business strategy, operational, and product development consulting
services to manufacturers of voice and data equipment for the
telecommunications industry. Mr. Fredrick also served as Senior Vice
President, Commercial Services for Digicon Corporation from 1995 to 1996.
Digicon is a supplier of data and telecommunications services to the federal
government. While at Digicon, Mr. Fredrick was involved in the development of
cellular telephone service in the Middle East and Russia. Mr. Fredrick served
as a General Manager for Optelecom Corporation, a manufacturer of fiber optic
telecommunications hardware, from 1996 to 1998. From 1991 to 1996, he served
as Vice President of Business Development, Vice President of Marketing, and
General Manager of the Storage Systems Business Group of Network Imaging
Corporation, a developer of client server software systems for the
telecommunications industry.
SHAWN P. RICHMOND, 32, has been a Vice President of Telecom Wireless
since April 1999 and serves as President of Sys-Group, Inc., doing business
as Prentice Technologies, Inc., a 90% owned subsidiary that Telecom Wireless
acquired from Mr. Richmond in September 1999. Mr. Richmond founded the
predecessor of Prentice in 1994 and has served as president and a director of
those entities since that time. See "Part I, Item 1. Description of Business
- --Acquisitions." Since 1998, Mr. Richmond has been a Senior Partner of
Richmond & Company Capital Group, LLC, a venture capital firm he co-founded
which invests in information technology. He also was a founder of the
American Association of Independent Consultants. Mr. Richmond received a B.S.
degree in computer science from Southwest Texas State University School of
Science.
OTHER OFFICERS
The following paragraphs identify other officers of Telecom Wireless:
PAUL L. FRANCIS, 49, has been an officer of Telecom Wireless since
April 1999. He was appointed Chief Technology Officer in October 1999. A
British native, Mr. Francis has more than 30 years' experience in the
telecommunications industry. He has spent the past 19 years as an independent
engineer and consultant. From May 1998 to April 1999, he was associated with
Francis Walker & Co., London, England. He has consulted for such companies as
Plessey, British Petroleum, Reuters and Solomon Brothers. He is an associate
member of The Institute of Incorporated Engineers and is an affiliate of the
Engineering Council in the United Kingdom. In 1979, he earned a Full
Technological Certificate at the Chelmer Institute in the United Kingdom.
45
<PAGE>
ESPER GULLATT JR., 41, has been an officer of Telecom Wireless since
April 1999. He was appointed Vice President-Business Development of the
company in October 1999. Previously, Mr. Gullatt was Chief Executive Officer
and a director of Capstone Group, Inc., Denver, Colorado, a
telecommunications business he founded in January 1994. From October, 1995 to
August, 1998, Mr. Gullatt was Chief Financial Officer and a director of DCC
Solutions, Inc., Denver, Colorado, a wireless telephone dealer and airtime
reseller that he co-founded. From November, 1988 to October, 1995, Mr.
Gullatt served as Chief Financial Analyst for the Colorado Department of
Public Safety. He received a Bachelor of Accountancy degree from the
University of Oklahoma-Norman in 1983, and was employed as an accountant by
Deloitte, Haskins & Sells from January 1981 to March 1982.
ALLEN LEEDS, 48, has been Vice President-International Business
Development of Telecom Wireless since April 1999. Mr. Leeds has been a
General Manager and Director of First Broadcast Partners, LLC, a wireless
spectrum holding company based in New York, since 1995. From 1995 to 1996 he
was also an officer and director of U.S. Wireless, Austin, Texas, a wireless
cable television company. Mr. Leeds was a founder of Peoples Telephone
Company, a Miami, Florida, publicly traded company that operated pay
telephones and served as a director of Peoples Telephone from 1986 to 1993.
Mr. Leeds attended Babson College and the New York Institute of Finance.
LEWIS G. POLLACK, 54, has served as an officer of Telecom Wireless
since April 1999. In October 1999, he was appointed Vice President-Product
Development. Mr. Pollack founded World Lynx, Inc., a regional high-speed
Internet provider based in Little Rock, Arkansas, in 1993 and served as its
Chief Executive Officer until 1998. From 1990 to 1993 he served as Vice
President, Marketing for the Information Management Services Division of
Lockheed Corporation. He also helped establish and from 1986 to 1991 served
as Vice President of Marketing for Program Monitor, Inc., a company in the
electronic home detention business. Mr. Pollack was educated at the
University of California at Los Angeles, where he was a Fellow in special
education and received a Ph.D.ABD in that field. He also received an M.A.
from Trenton State College and a B.A. from Franklin & Marshall College.
LYNNE K. ROBERTS, 48, has served as Vice President-Human Resources and
Secretary of Telecom Wireless since May 1999. From March 1997 through
November 1998, she was Vice President of Voice and Data Communications, Inc.,
a Greenwich, Connecticut, telecommunications company. From 1986 through
February 1997, Ms. Roberts was associated with CGI Worldwide, Inc.,
Englewood, Colorado, where her duties included business development for the
company. CGI is a telecommunications company which has designed, engineered,
constructed and developed over 80 cellular, paging and cable television
systems around the world. Before joining CGI, Ms. Roberts was a senior credit
analyst with Motorola Communications, San Mateo, California.
ADVISORY BOARD
Telecom Wireless has established an Advisory Board to consist of
persons having experience and expertise in areas relevant to the business of
the company who are not employed by the company. The purpose of the Advisory
Board is to provide information and guidance to the Board of Directors with
respect to all aspects of the company's business, including operations,
regulation and finance. To date, only one member of the advisory board has
been identified. The Board of Directors will identify additional advisory
board members based upon their experience, education and other qualifications.
JOHN H. SUNUNU served as Chief of Staff and Counselor to President
George Bush from 1989 to 1992. He had served as Governor of New Hampshire
from 1983 until 1989. Since leaving the White House, Governor Sununu has
pursued various business interests and was co-host of CNN's nightly
"Crossfire" program from 1992 to 1998. Before becoming Governor of New
Hampshire, he was an educator, engineer and small businessman. He earned his
Ph.D. in mechanical engineering from
46
<PAGE>
Massachusetts Institute of Technology in 1966. From 1968 until 1973, he was
Associate Dean of the College of Engineering and Associate Professor of
Mechanical Engineering at Tufts University. He was on the Advisory Board of
the Technology and Policy Program at MIT from 1984 to 1989. From 1963 until
his election as Governor, he was President of JHS Engineering Company and
Thermal Research, Inc. He helped establish and from 1960 until 1965 served as
Chief Engineer of Astro Dynamics, Inc.
ITEM 6. EXECUTIVE COMPENSATION
SALARY AND BONUS; EMPLOYMENT AGREEMENTS. No executive officer was
paid more than $100,000 in salary and bonus for services provided to the
company during the fiscal year ended June 30, 1999.
Telecom Wireless has entered into written employment agreements with
all its executive officers except Dr. Roberts. Each agreement has a term of
three years from April 1, 1999, and provides for payment of a base salary,
which may be increased at the end of each year. The annual salaries payable
by the company to Dr. Roberts and the other executive officers of the company
under these agreements or other arrangements were as follows as of the date
of this registration statement:
<TABLE>
<CAPTION>
ANNUAL SALARY
-------------
<S> <C>
James C. Roberts $250,000
Calvin D. Smiley $225,000
Kosta S. Kovachev $250,000
Robert L. Fredrick $225,000
Shawn P. Richmond $125,000
</TABLE>
All officers of the company are eligible to participate in the
executive bonus pool, which is fixed at an amount equal to five percent of
the adjusted net profits of Telecom Wireless less certain items, including
contributions to pension or profit sharing plans (of which there currently
are none), extraordinary gains or losses, and refunds or deficiencies of
federal or state income taxes paid in a prior year. The maximum bonus payable
for any one year may not exceed 100% of the officer's base salary for the
year.
Under the written employment agreements, the company may terminate the
officer's employment at its discretion at any time during the initial
three-year term. However, the company must pay the officer an amount equal to
the officer's base salary for the remainder of the initial term. After the
initial term, the officer's employment may be terminated by the company
without cause upon payment on the termination date of an amount equal to six
times the officer's then monthly base salary. An officer may terminate a
written employment agreement on 30 days' notice to the company.
The company may also terminate the written agreements for cause as
defined in the agreements. The company must give the officer notice of the
breach, however, and an opportunity to cure.
If the company is acquired, is the non-surviving party in a merger, or
sells all or substantially all its assets, the company is required to use its
best efforts to cause the written employment agreements to be assumed by the
acquirer or surviving company.
OPTION GRANTS IN LAST FISCAL YEAR. The following table provides
information on options granted to the executive officers of the company
during the fiscal year ended June 30, 1999. All such options are
non-qualified options exercisable at the fair market value of a share of the
company's
47
<PAGE>
common stock on the date of grant. The options have no value unless the
company's stock price appreciates beyond the exercise price and the holder
satisfies all applicable vesting requirements. All the options granted to
executive officers during 1999 vest 33-1/3% per year over three years. They
also vest in full on a change in control of the company. The options
reflected in the table were granted before adoption of the company's 1999
Stock Option and Restricted Stock Plan, which is discussed below.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Percent of Total
Securities Options Granted to Exercise
Underlying Employees in Price Expiration
Name Options Granted Fiscal Year ($/Share) Date
---- --------------- ----------- --------- ----
<S> <C> <C> <C> <C>
James C. Roberts 2,000,000 36.1% $10.55 Apr. 13, 2004
Calvin D. Smiley 200,000 3.6% $10.55 Apr. 13, 2004
Kosta S. Kovachev 1,000,000 18.0% $10.55 Apr. 13, 2004
Robert L. Fredrick 500,000 9.0% $10.55 Apr. 13, 2004
Shawn P. Richmond 200,000 3.7% $10.55 Apr. 13, 2004
</TABLE>
OPTION EXERCISES AND VALUES. None of the options granted to the
executive officers of Telecom Wireless before the end of fiscal year 1999
were exercisable before the end of that year. In accordance with SEC
regulations, the following table nevertheless provides information on
exercises of stock options during the fiscal year and the fiscal year-end
value of unexercised options:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Shares Unexercised Value of Unexercised
Acquired on Value Options at Fiscal In-the-Money Options at
Name Exercise (#) Realized ($) Year End (#) Fiscal Year End ($)
---- ------------ ------------ ------------ -------------------
Exercisable/ Exercisable/
Unexercisable Unexercisable
------------- -------------
<S> <C> <C> <C> <C>
James C. Roberts 0 0 0/2,000,000 0/$3,556,000
Calvin D. Smiley 0 0 0/200,000 0/$355,600
Kosta S. Kovachev 0 0 0/1,000,000 0/$1,778,000
Robert L. Fredrick 0 0 0/500,000 0/$889,000
Shawn P. Richmond 0 0 0/200,000 0/$355,600
</TABLE>
RECENT GRANTS OF OPTIONS. In connection with Mr. Smiley's appointment
as chief operating officer of Telecom Wireless in August 1999, the company
granted him options to purchase 300,000 shares of common stock at an exercise
price of $14.42 per share, the fair market value of a share of the company's
common stock on the date of grant. The options vest in equal installments
over three years beginning one year from the date of grant, and expire in
August 2004. For administrative convenience, these options were not granted
under the company's 1999 Stock Option and Restricted Stock
48
<PAGE>
Plan. The Company granted an identical option to Esper Gullatt, Jr., in
connection with his concurrent appointment as Vice President-Business
Development.
In September 1999, Mr. Richmond was granted options to acquire 350,000
shares of the common stock of Telecom Wireless under his employment contract
with the company. The company entered into the contract in connection with
its acquisition of Prentice Technologies, Inc. The options vest over a
three-year period in installments of 100,000 each after the first two years
and 150,000 after the third year, assuming certain financial performance
criteria to be approved by the company's Board of Directors are met. The
criteria includes minimum annual revenues from the company's ASP business of
$10 million for the fiscal year ending June 30, 2000, $20 million for the
fiscal year ending June 30, 2001 and $30 million for the fiscal year ending
June 30, 2002. Half of the options vesting after any year are exercisable at
$0.10 per share. The other half are exercisable at $7.73 per share. The
options vest in full upon a change in control of the company or if Mr.
Richmond's employment is terminated without cause during the initial
three-year term of his employment contract, whether or not the performance
criteria are satisfied. The options expire in September 2009.
1999 STOCK OPTION AND RESTRICTED STOCK PLAN
The Board of Directors of Telecom Wireless adopted the company's 1999
Stock Option and Restricted Stock Plan, which we sometimes refer to below as
the "1999 Plan," to attract and retain qualified personnel. A total of
800,000 shares of the company's common stock may be issued to grantees and
recipients under the plan. The plan allows issuance of both qualified (or
incentive) options and non-qualified options as well as shares of restricted
stock (stock awards) and by its terms continues in effect for ten years.
Options and stock awards will be granted to employees, independent
contractors, officers, directors and consultants at the discretion of the
Board of Directors or committee administering the plan.
The Board of Directors adopted the plan on May 4, 1999, but the plan
must be approved by a vote of the stockholders of Telecom Wireless within one
year of that date to become effective permanently. The plan provides for
appropriate adjustment in the number of shares subject to the plan and to
grants previously made if there is a stock split, stock dividend,
reorganization or other similar change affecting the company's corporate
structure or its equity securities. If shares under a grant are not issued to
the extent permitted before the expiration or forfeiture of the grant, those
shares would again be available for future grants under the plan. No grant
may be made under the plan after May 4, 2009, but awards granted before or on
that date may extend beyond it.
The Board of Directors has delegated administration of the 1999 Plan
to a committee of the Board consisting of two members of the Board. At such
time as Telecom Wireless has any class of equity security which is registered
under Section 12 of the Act, the committee is required to consist of two or
more non-employee directors, the members of which will meet the SEC
definition of "disinterested directors" and the IRS definition of "outside
directors." The option exercise price, exercise period, time of vesting, and
other terms of an option, in addition to terms that are applicable to a stock
award, will be determined by the committee. Telecom Wireless currently does
not have any disinterested directors.
All employees, officers, directors, and consultants of the company or
a subsidiary of the company are eligible for options and stock awards under
the 1999 Plan. At this time, it is not possible to predict the number of
employees who will be selected to receive options and/or stock awards under
the 1999 Plan, and the number of grantees could vary from time to time.
Unless otherwise fixed by the committee, the term of an option will be
five years from the date of grant, but no option may have a term of more than
ten years from the date of grant.
49
<PAGE>
Stock awards granted under the 1999 Plan may be subject to a
restricted period or may be fully vested as of the date of issuance. The
Board, in its sole discretion, at the time an award is made may prescribe
other restrictions in addition to expiration of the restricted period, such
as satisfaction of corporate or individual performance objectives.
There are no federal income tax consequences to a participant or the
company upon the grant of a stock option granted under the plan.
All stock options, and stock awards for which restrictions prescribed
by the Board have not been satisfied, are non-transferable, other than by
will or by the laws of descent and distribution, and may be exercised during
the grantee's lifetime only by the grantee.
Unvested portions of stock options and stock awards immediately expire upon
termination of employment for any reason other than death or disability,
unless the Board, in its discretion, determines otherwise; vested options may
be exercised for up to three months following the termination, unless
termination is for cause. If the company terminates employment for cause, all
unexercised awards expire upon the termination.
Shares of stock may not be issued or delivered upon exercise of a
stock option or stock award until the optionee or recipient pays the exercise
price in full, or any payment required under a stock grant agreement, if any,
and any required tax withholding and, if applicable, the completion of
registration and listing of the shares or qualification as a private
placement and the obtaining of any other required approvals.
The Board of Directors may amend, alter or discontinue the 1999 Plan,
provided that any such amendment, alteration or discontinuance does not
impair the rights of any grantee, without his or her consent, under any stock
option or stock award previously granted. The Board of Directors may not,
without stockholder approval, (i) increase the total amount of stock which
may be purchased or issued through options or awards granted under the 1999
Plan, or (ii) change the class of employees or consultants eligible to
participate in the 1999 Plan.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PHOENIX COMMUNICATIONS SHARE EXCHANGE
In April 1999, Telecom Wireless acquired all the issued and
outstanding shares of Phoenix Communications, Inc. The stockholders of
Phoenix received 13,825,000 shares of the common stock of Telecom Wireless in
exchange all of Phoenix's outstanding shares. Phoenix at the time was, and
remains, inactive and with no assets or liabilities. Accordingly, no value
was attributed to Phoenix for accounting purposes.
The stockholders of Phoenix included several members of management of
Telecom Wireless. Shares of Telecom Wireless' common stock were issued to
the following officers and directors, directly or indirectly, in the
following amounts and for the following deemed values in the exchange:
50
<PAGE>
<TABLE>
<CAPTION>
Name No. Shares
---- ----------
<S> <C>
James C. Roberts(1) 10,450,000
Calvin D. Smiley 100,000
Kosta S. Kovachev 750,000
Robert L. Fredrick 500,000
Lynne K. Roberts 300,000
Allen Leeds 1,000,000
Esper Gullatt, Jr. 100,000
Paul L. Francis 100,000
Lewis G. Pollack 100,000
Shawn P. Richmond 100,000
</TABLE>
(1) Held in the name of The Roberts Family Trust, of which Dr. Roberts and
his spouse, Lynne K. Roberts, are sole trustees.
JOHN H. SUNUNU
On August 31, 1999, Telecom Wireless entered into a Services Agreement
with John H. Sununu, a member of the company's Advisory Board. The Services
Agreement requires Governor Sununu to render financial consulting and other
services to the company for 48 months. As consideration, Telecom Wireless
issued to Governor Sununu two stock purchase warrants at the time the parties
entered into the Services Agreement. The first is for the purchase of 500,000
shares of the company's common stock at an exercise price of $5.50 per share.
The closing price of the company's common stock on the trading day
immediately before the execution and delivery of the Services Agreement was
$13.75 per share. The second warrant is for the purchase of 720,000 shares
of the company's common stock. This warrant vests at the rate of 15,000
shares per month for 48 consecutive months. The exercise price for each
installment is 50% of the market value of the company's common stock on the
vesting date for that installment. For this purpose, market value is deemed
to be the average of the closing prices for the 20 trading days preceding the
vesting date. In the event of a change in control, an additional number of
installments are to vest and become exercisable equal to the number of
previously vested installments, and the number of shares included in each
monthly installment will double. The parties can terminate the Services
Agreement at any time upon giving ten days' notice to each other. The company
has recorded approximately $122,000 of stock-based compensation for the
quarter ended September 30, 1999, as a result of the issuance of these two
warrants.
On August 5, 1999, Governor Sununu, through a retirement plan
controlled by him, purchased 53,000 shares of restricted common stock of
Telecom Wireless for $7.00 per share in a private placement. The shares had
registration rights and were accompanied by repricing warrants. The closing
price of the company's publicly traded common stock on the trading day
immediately before Governor Sununu's purchase was $14.38 per share. These
53,000 shares and 53,000 shares issuable under the repricing warrants are
among the shares covered by this registration statement.
KEYS MICROCABLE TRANSACTION
In early 1999, Calvin D. Smiley, the President and a director of
Telecom Wireless, and Esper Gullatt, Jr., the Vice President - Business
Development of the company, entered into a management agreement through an
entity controlled by them whereby they were to receive a 50% equity interest
in Keys Microcable Corporation ("KMC"), a wholly-owned subsidiary of the
company, in consideration of the performance of management services. At that
time, Messrs. Smiley and Gullatt were not associated with the company, so
that the agreement was negotiated at arms' length. However, this agreement
was
51
<PAGE>
terminated, after partial performance, in connection with the April 1999
Phoenix Communications share exchange described above. The Board of Directors
(Mr. Smiley abstaining) has approved a settlement of any claims Messrs.
Smiley and Gullatt may have for an equity interest in KMC for $650,000,
payable by issuance of warrants for the purchase of 123,222 shares of
restricted common stock of Telecom Wireless at an exercise price of $5.275
per share, or 50% of the average closing price per share for the 20 trading
days preceding April 12, 1999, the date on which present management assumed
control of the company.
LOAN TO OFFICER
In August 1999, Telecom Wireless loaned $60,000 to Kosta S. Kovachev,
the company's Executive Vice President and Chief Financial Officer. The loan
is considered an advance of Mr. Kovachev's executive bonus, if any, for the
current fiscal year, which ends June 30, 2000. The company may withhold the
amount due on the loan from the bonus. As of the date of this registration
statement, the remaining terms of this loan have not been determined.
LOAN FROM OFFICER
In October 1999, James C. Roberts, Chief Executive Officer and
Chairman of the Board of Directors of the company, loaned the company
$250,000. As of the date of this registration statement, the terms of this
loan have not been established.
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of Telecom Wireless consists of 100,000,000
shares of common stock and 25,000,000 shares of preferred stock. As of
November 19, 1999, the company had 16,426,377 shares of common stock
outstanding, held by 449 stockholders of record, and 20,000 shares of
preferred stock held by one stockholder of record.
COMMON STOCK
All shares of common stock have equal voting rights and, when validly
issued and outstanding, have one vote per share in all matters to be voted
upon by the common stockholders. The shares of common stock have no
preemptive, conversion or redemption rights and may only be issued as fully
paid and nonassessable shares. Cumulative voting in the election of directors
is not allowed, which means that the holders of a majority of the issued and
outstanding shares of common stock will be able to elect all the company's
directors should they choose to do so. Each holder of common stock, upon
liquidation of the company, is entitled to receive a pro rata share of the
company's assets available for distribution to common stockholders.
PREFERRED STOCK
The company is authorized to issue up to 25,000,000 shares of
preferred stock, $.001 par value per share, in series. The company's Board
of Directors is authorized to establish from time to time the number of
shares to be included in each such series and to fix the designation, powers,
preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
52
<PAGE>
Dividends on outstanding shares of preferred stock shall be paid or
declared and set apart for payment, before any dividends shall be paid or
declared and set apart for payment on common stock of the company with
respect to the same dividend period.
Unless otherwise provided in any resolution of the Board of Directors
of the company providing for the issuance of any particular series of
preferred stock, no holder of preferred stock shall have any pre-emptive
right as such holder to subscribe for, purchase or receive any part of any
new or additional issue of capital stock of any class or series.
REDEEMABLE, NON-VOTING, CONVERTIBLE PREFERRED STOCK - SERIES 1998-1
The company's Board of Directors has designated 20,000 shares of
preferred stock as the Redeemable, Non-Voting, Convertible Preferred Stock
- -Series 1998-1 (the "Series 1998-1 Preferred").
Series 1998-1 Preferred shall be convertible into shares of common
stock of the company upon the filing of a registration statement with the SEC
for a public offering of shares of the company. One-half of the shares upon
exercise of the conversion will have piggyback registration rights on the
first public offering; the remaining shares resulting from the conversion
will have piggyback registration rights on the next public offering. The
conversion rate will be determined at the time of the public offering by
first taking 25% of the price at which a share of the company's common stock
will be offered to the public. This number so calculated will be the divisor
and the redemption price of $100 will be the dividend and the quotient will
then be the number of shares of common stock into which each share of Series
1998-1 Preferred will be convertible.
Commencing on January 1, 2005, the company has the right to redeem the
Series 1998-1 Preferred at any time and form time to time in whole or in
part. The redemption price for each share of Series 1998-1 Preferred is
$100.00. In the event of a redemption of only a part of the outstanding
Series 1998-1 Preferred, the company will effect such redemption ratably
according to the number of shares held by each holder of the Series 1998-1
Preferred.
Shares of Series 1998-1 Preferred have no voting rights unless
otherwise expressly required by the laws of the State of Utah.
Upon liquidation, dissolution or winding up of the company, whether
voluntary or involuntary, resulting in the distribution of its assets to its
shareholders, the holders of Series 1998-1 Preferred then issued and
outstanding shall be entitled to receive an amount equal to $100 per share
plus any accumulated but unpaid dividends, and no more, before any payment or
distribution of the assets of the company is made to or set apart for the
holders of common stock of the company. If the assets of the company are
insufficient for the payment to them of the full preferential amount
described above, such assets shall be distributed ratably among the holders
of the Series 1998-1 Preferred.
53
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) MARKET PRICE
The common stock of Telecom Wireless is traded in the over-the-counter
(OTC) market and quoted through the OTC Bulletin Board under the symbol
"NOYR." The market for the common stock is characterized generally by low
volume and broad price and volume volatility. Telecom Wireless cannot give
any assurance that a stable trading market will develop for its stock.
The following table sets forth the range of high and low bid
quotations for the company's common stock for each of the quarters within the
last two fiscal years:
HIGH AND LOW BID PRICES
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1998 Low Bid High Bid
------------------------------- ------- --------
<S> <C> <C>
First Quarter $ * $ *
Second Quarter $ * $ *
Third Quarter $ 8 3/4 $ 12 1/2
Fourth Quarter $ 5 $ 42 1/2
<CAPTION>
Fiscal Year Ended June 30, 1999 Low Bid High Bid
------------------------------- ------- --------
<S> <C> <C>
First Quarter $ 22 1/2 $ 61 1/4
Second Quarter $ 5 $ 33 1/8
Third Quarter $ 8 1/8 $ 18 3/4
Fourth Quarter $ 3 3/4 $ 18
</TABLE>
-----------------------
* Not available.
The quotations in the table above reflect inter-dealer prices, without
retail mark-up, mark-down or commissions, and may not represent actual
transactions. They have been adjusted for a one-for-50 reverse stock split
effected on April 23, 1998, and a one-for-five reverse stock split effected
on May 4, 1999.
(b) HOLDERS
As of November 19, 1999, the company had 16,426,377 shares of common
stock outstanding, held by 449 stockholders of record, and 20,000 shares of
preferred stock held by one stockholder of record.
(c) DIVIDENDS
Telecom Wireless has not paid any dividends on its common stock.
Telecom Wireless currently intends to retain any earnings for use in its
operations and to finance acquisitions. Therefore, Telecom Wireless does not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors. Any future
decision with respect to dividends will depend
54
<PAGE>
on future earnings, future capital needs and the registrant's operating and
financial condition, among other factors.
ITEM 2. LEGAL PROCEEDINGS
Except with respect to the West Palm Beach lease discussed above under
"Properties" and the claims discussed below, no litigation is pending or, to
the knowledge of management, threatened against Telecom Wireless Corporation
or any of its subsidiaries that, individually or collectively, could have a
material adverse effect upon the company's financial condition.
By letter dated November 16, 1999, Shawn P. Richmond, through his
attorney, seeks rescission of his sale of 90% of the common stock of Prentice
Technologies, Inc. to the company. See "Part I, Item 1. Description of
Business -- Acquisitions." Mr. Richmond alleges that the company made
material misrepresentations and/or failed to disclose material information in
connection with the transaction. In addition, he seeks a substantial amount
of money. Management denies the allegations and intends to vigorously defend
any legal proceedings which may result from these claims. As of the date of
this registration statement, Mr. Richmond and the company are in negotiations
including the possible spin-off of Prentice on an accelerated schedule.
In September 1999, the company entered into agreements to acquire a
small equity interest in each of two entities for $1.6 million in cash and
500,000 shares of the company's common stock with registration rights. The
company paid $700,000 (financed with borrowed funds under a convertible
promissory note due in May 2000) and the balance is due in installments
ending in June 2000. Concurrently, the company entered into a five-year
license that purports to obligate the company to place a purchase order for
equipment backed by a non-cancelable letter of credit. The company has not
delivered the 500,000 shares. The seller/licensor has given notice of default
and termination of the right to purchase the equity interest in one of the
entities and the license agreement. Title to the equity interest in the other
entity has been delivered to the company. In addition, the seller/licensor
claims the company is obligated to pay the additional $900,000.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Within the past three years, Registrant has sold the following
securities without registering them under the Securities Act of 1933:
Present management assumed control of the issuer in April 1999.
Records regarding sales of Registrant's securities prior to that time are
incomplete and many records prior to about May 1998 are largely unavailable.
55
<PAGE>
Between March 10, 1998 and July 20, 1998, Registrant authorized the
issuance of and issued 255,400 shares of common stock and an option for the
purchase of 260,000 shares of common stock to ten individuals and one entity
which appears to have been affiliated with one of such individuals.
Management believes these securities were issued in consideration of services
rendered to Registrant. The securities registration exemption relied upon by
Registrant is unknown.
On or about May 8, 1998, Registrant authorized the issuance of and
thereafter issued 5,200 shares of its common stock to four individuals in
consideration of $.50 per share. The securities registration exemption relied
upon by Registrant is unknown. In June, 1998, Registrant authorized the
issuance of and issued 463,092 shares of its common stock to five persons in
exchange for all of the common stock of Keys Microcable Corporation.
Registrant also authorized the issuance to one of the former shareholders of
Keys Microcable Corporation convertible preferred stock in connection with
the conversion to equity of approximately $1.2 million of debt owed by Keys
Microcable Corporation. Registrant also issued an option for the purchase of
shares of its common stock to the same individual. It appears Registrant
relied upon the exemption from securities registration provided by Section
4(2) and/or Rule 506 of Regulation D under the Securities Act.
In August 1998, Registrant authorized the issuance of and issued
120,000 shares of common stock to Cavalier Securities, Ltd., or its nominees.
Management believes that all or a substantial portion of these securities
were sold for cash. It appears Registrant relied upon the exemption from
securities registration provided by Rule 504 of Regulation D under the
Securities Act.
On or about March 26, 1999, Registrant authorized for issuance and
thereafter issued 13,825,000 shares of its common stock in exchange for the
13,500 outstanding shares of the common stock of Phoenix Communications,
Inc., held by 13 persons of which nine are accredited investors. The
exchange was consummated in April 1999. Of the 13 former shareholders of
Phoenix Communications, Inc., 11 either are or have been members of
management of Registrant subsequent to the exchange.
In April, 1999, Registrant authorized for issuance and thereafter sold
120,000 shares of common stock for gross proceeds aggregating $600,000 to six
persons pursuant to the exemption from securities registration provided by
Rule 504 of Regulation D under the Securities Act. Placement agent fees and
costs aggregating $83,100 were paid to Jack Augsback & Associates, Inc., a
non-affiliated third party, and others.
Registrant entered into Common Stock Purchase Agreements dated May 25,
1999, July 28, 1999, and September 10, 1999, pursuant to which 466,963 shares
of Registrant's common stock, with registration rights, thereafter were sold
to 28 persons for gross proceeds aggregating $3,268,745. One such person is
not accredited. Registrant also issued repricing warrants to purchasers in
the offering. Shares of the Registrant's common stock are issuable under the
repricing warrants if the average of the closing bid prices of the
Registrant's common stock is less that $8.75 for the 20 trading days
immediately after the effective date of the registration statement in which
the purchased shares are included pursuant to the registration rights. If
the average is less than $8.75, the repricing shares are required to be
issued at a negligible exercise price, $.001 per share, on or after the 21st
trading day after the effective date. The number of repricing shares to be
issued will be calculated by taking the number of shares of common stock
originally purchased by the stockholder and multiplying by a fraction, the
numerator of which is $8.75 minus the average and the denominator of which is
the average itself. Placement agent fees and costs aggregating $500,020 were
paid to Jack Augsback & Associates, Inc., and Thomson Kernaghan & Co. Ltd.,
non-affiliated third parties, and others. Jack Augsback & Associates, Inc.,
Thomson Kernaghan & Co. Ltd. and their assignees also were issued warrants
for the purchase of 195,487 shares of the Company's common stock.
On July 7, 1999, Registrant authorized for issuance and subsequently
issued 17,500 shares of its common stock to one entity in consideration of
services rendered to Registrant by that entity.
Effective in April, May and August 1999, Registrant issued
non-qualified options for the purchase of 5,561,192 shares of its common
stock to nine officers and one employee of Registrant of which eight are
accredited investors.
56
<PAGE>
Between April 14, 1999, and September 30, 1999, Registrant issued
38,046 shares of its common stock and issued or has agreed to issue
non-qualified and incentive options for the purchase of 170,328 shares of its
common stock to employees of Registrant and a subsidiary of Registrant in
compensatory transactions pursuant to the exemption from securities
registration provided by Rule 701 under the Securities Act.
In August 1999, Registrant issued or authorized the issuance of
warrants for the purchase of up to 1,340,000 shares of its common stock to
three financial consultants.
Effective in August 1999, Registrant issued warrants for the purchase
of 119,432 shares of its common stock to two officers of Registrant, one of
which is accredited, in consideration of management services rendered to a
subsidiary of the company prior to April 1999.
In November 1999, Registrant issued to one person a promissory note in
the principal amount of $700,000 convertible into shares of the Company's
common stock at a conversion price of $7.00 per share in consideration of the
assignment of certain technology-related equity interests.
In September and October 1999, Registrant issued for $1,000,000 in
cash promissory notes aggregating $1,000,000 in principal amount and warrants
for the purchase of 200,000 shares of its common stock to seven persons.
Placement agent fees in the form of a warrant for the purchase of 300,000
shares of Registrant's common stock were paid to First Equity Capital
Securities, Inc., a non-affiliated third party.
In July and September 1999, Registrant issued 375,229 shares of its
common stock and options for the purchase of 350,000 shares of its common
stock in connection with its acquisition of America's Web Station, Inc., and
Prentice Technologies, Inc., to three individuals. Two of the three
individuals are not accredited investors as defined in the Securities Act.
In December 1999, the Company authorized the issuance of 100,000
shares of its common stock to one individual for gross proceeds aggregating
$250,000 and warrants for the purchase of an additional 100,000 shares.
With respect to all of the transactions which occurred after closing
of the acquisition by Registrant of Phoenix Communications, Inc., in April
1999:
1. The purchasers represented they were taking the securities for
investment and not for distribution.
2. The purchasers acknowledged that the certificates evidencing the
securities would bear a legend restricting transfer under the
Securities Act since they had not been sold in a registered
offering.
3. Except as stated above and except as to transactions claimed to be
exempt from registration pursuant to Rule 701 under the Securities
Act, all purchasers represented to Registrant that they were
accredited investors as defined in the Securities Act.
4. Except as stated above, Registrant relied upon the exemption from
securities registration provided by Section 4(2) and/or Rule 506
of Regulation D under the Securities Act and/or Rule 701 under the
Securities Act with respect to certain compensatory transactions.
Section 4(2) of the Securities Act covers "transactions by an
issuer not involving any public offering," with respect to the
issuance of securities without registration under the Securities
Act of 1933. The Company believes that the persons to whom the
securities were issued did not need the protections that
registration would afford.
57
<PAGE>
All share amounts in the discussion above have been restated to
reflect the 1-for-50 reverse stock split of the Registrant on April 23, 1998
and the 1-for-5 reverse stock split of the Registrant on May 4, 1999.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation provide that the company shall
provide indemnification and/or exculpation to its directors, officers,
employees, agents and other entities that deal with it to the maximum extent
provided, and under the terms provided, by the laws and decisions of the
courts of the State of Utah and by any additional applicable federal or state
laws or court decisions.
The Utah Revised Business Corporation Act ("URBCA") provides that a
corporation may indemnify a director of the corporation who was, is or is
threatened to be made, a named defendant or respondent in a proceeding by
virtue of his position in the corporation if his conduct was in good faith
and he reasonably believed that the conduct was in, or not opposed to, the
corporation's best interests; and in the case of any criminal proceeding, he
or she had no reasonable cause to believe the conduct was unlawful. However,
the URBCA provides that a corporation may not indemnify a director: (i) in
connection with a proceeding by or in the right of the corporation in which
the director was adjudged liable or (ii) in connection with any other
proceeding charging that the director derived an improper personal benefit,
whether or not involving an action taken in his official capacity, in which
proceeding he was adjudged liable on the basis that he derived an improper
personal benefit. Indemnification is limited to reasonable expenses incurred
in connection with the proceeding. The URBCA further provides that unless
limited by the articles of incorporation, a corporation shall indemnify a
director who is successful, on the merits or otherwise, in the defense of any
proceeding or in the defense of any claim, issue or matter in the proceeding,
to which he or she was a party because he or she is or was a director of the
corporation, against reasonable expenses incurred in connection with the
successful defense of any such proceeding or claim.
A corporation may pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition if (i) the director furnishes the corporation a written
affirmation of his or her good faith belief that he or she has met the
applicable standard of conduct described in the URBCA, (ii) the director
furnishes the corporation a written undertaking to repay the advance if it is
ultimately determined that he or she did not meet such standard of conduct
and (iii) a determination is made that the facts then known to those making
such determination would not preclude indemnification under the URBCA.
A director may also seek court-ordered indemnification under the
URBCA, provided that such indemnification is limited to reasonable expenses
incurred, and the court may order such indemnification regardless of whether
the director has met the applicable standard of conduct set forth in the
URBCA.
The URBCA outlines the requirements for determining and authorizing
indemnification of directors, and provides that a determination shall be made
(i) by a majority vote of the board of directors, with only those director
not party to the proceeding being counted in satisfying the presence of a
quorum; (ii) if a quorum cannot be obtained, by a majority vote of a
committee of the board of directors designated by the board of directors,
which committee shall consist of two or more directors not party to the
proceeding, except that directors who are party to the proceeding may
participate in the designation of directors for the committee, (iii) by
special legal counsel selected by a quorum of the board of directors or its
committee or, if a quorum of the board of directors cannot be obtained and a
committee cannot be designated, selected by a majority vote of the full board
of directors, in which selection directors who are parties to the proceeding
may participate or (iv) by the stockholders, by a majority of the votes
entitled to be cast by the holders of qualified shares present in person or
by proxy at a meeting.
58
<PAGE>
An officer is entitled to mandatory indemnification and may apply for
court-ordered indemnification to the same extent as a director under the
URBCA. A corporation may also indemnify and advance expenses to an officer,
employee, fiduciary or agent to the same extent as to any director and to a
greater extent, if not inconsistent with public policy, and if provided for
by its articles of incorporation, bylaws, general or specific action of its
board of directors or contract.
A provision treating a corporation's indemnification of, or advance
for expenses to, directors that is contained in its articles of incorporation
or bylaws, in a resolution of its shareholders or board of directors, or in a
contract (except an insurance policy) or otherwise is valid only if and to
the extent the provision is not inconsistent with the URBCA.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, (the "Act") may be permitted to
directors, officers, and controlling persons of the company pursuant to the
foregoing provisions, or otherwise, the company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the company of expenses incurred or
paid by a director, officer or controlling person of the company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to the court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
59
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
TELECOM WIRELESS CORPORATION
Independent Auditors' Reports..................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets................................................F-3
Consolidated Statements of Operations......................................F-4
Consolidated Statement of Changes in Shareholders' Equity..................F-5
Consolidated Statements of Cash Flows......................................F-6
Notes to Consolidated Financial Statements.....................................F-8
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
Independent Auditors' Report..................................................F-28
Financial Statements
Balance Sheets............................................................F-29
Statements of Operations..................................................F-30
Statement of Changes in Shareholders' Equity..............................F-31
Statements of Cash Flows..................................................F-32
Notes to Financial Statements.................................................F-33
AMERICA'S WEB STATION, INC.
Independent Auditors' Report..................................................F-39
Financial Statements
Balance Sheets............................................................F-40
Statements of Operations..................................................F-41
Statement of Changes in Shareholders' Equity..............................F-42
Statements of Cash Flows..................................................F-43
Notes to Financial Statements.................................................F-44
UNAUDITED PRO FORMA INFORMATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS..............................F-50
UNAUDITED PRO FORMA COMBINED STATEMENTS OF CASH FLOWS..............................F-52
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS.........................F-54
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Telecom Wireless Corporation
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Telecom Wireless
Corporation and Subsidiary (the Company) as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the fiscal year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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 of Telecom Wireless
Corporation and Subsidiary at June 30, 1999 the results of their operations and
their cash flows for the year then ended 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 recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Ehrhardt Keefe Steiner & Hottman PC
October 26, 1999
Denver, Colorado
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Telecom Wireless Corporation
Boca Raton, Florida
We have audited the accompanying consolidated statements of operations,
accumulated deficit, and cash flows of Telecom Wireless Corporation and
Subsidiary (the Company) for the year ended June 30, 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 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Telecom Wireless Corporation and
Subsidiary's operations and their cash flows for the year ended June 30, 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 recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Gerstle, Rosen & Associates, P.A.
September 22, 1998
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
----------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 620,666 $ 695,779
Accounts receivable, net of allowance of $14,000 49,559 700,812
Accounts receivable - employees - 135,163
Stock subscription receivable (paid in full subsequent to year end) (Note 12) 352,666 -
----------- --------------
Total current assets 1,022,891 1,531,754
----------- --------------
Property and equipment, net (Note 4) 589,797 958,412
----------- --------------
Intangible assets
Subscribers list (Note 3) - 225,000
Licenses (Note 16) 523,117 523,117
Goodwill (note 3) 741,848 3,530,218
Less accumulated amortization (300,978) (357,963)
----------- --------------
Net intangible assets 963,987 3,920,372
----------- --------------
Idle equipment (Note 16) 181,256 174,285
Deferred acquisition costs - 391,858
Deferred offering costs - 100,850
Other assets 18,962 77,064
----------- --------------
Total assets $ 2,776,893 $ 7,154,595
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line-of-credit (Note 6) $ - $ 60,043
Note payable - financing agreement (Note 7) - 311,722
Accounts payable 618,006 1,767,000
Short-term notes payable (Note 9) - 1,294,135
Accrued expenses (Note 5) 140,703 62,961
Current portion of capital lease obligations (Note 8) - 13,921
Deferred rent liability - 163,221
Current portion of notes payable (Note 10) - 5,662
----------- ------------
Total current liabilities 758,709 3,678,665
Note payable, less current portion (Note 10) - 7,772
Capital lease obligation, less current portion (Note 8) - 149,800
----------- ------------
758,709 3,836,237
----------- ------------
Commitments and contingencies (Notes 12, 13, 16 and 17)
Minority interest (Note 3) - 16,061
Stockholders' equity (Notes 12, 13 and 14)
Preferred stock, $.001 par value, 25,000,000 shares authorized, 20,000 shares
issued and outstanding (Note 11) 2,000,000 2,000,000
Less discount on preferred stock (631,932) (607,493)
----------- ------------
1,368,068 1,392,507
Common stock, $.001 par value, 100,000,000 shares authorized; 15,107,920
(June 30, 1999) and 15,753,518 (September 30, 1999) shares issued and
outstanding
15,108 15,754
Additional paid-in capital 4,315,231 8,460,417
Accumulated deficit (3,680,223) (6,566,380)
----------- ------------
Total stockholders' equity 2,018,184 3,302,298
----------- ------------
Total liabilities and stockholders' equity $ 2,776,893 $ 7,154,595
----------- ------------
----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended For the Three Months Ended
June 30, September 30,
------------------------------- -------------------------------
1998 1999 1998 1999
------------ ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue
Internet services $ - $ - $ - $ 28,535
Wireless TV revenues 45,060 517,261 137,859 138,390
Other 2,138 5,393 6,495 4,075
------------ ----------- ----------- ------------
Total revenues 47,198 522,654 144,354 171,000
Internet service operating costs - - - 27,823
Direct costs 29,032 275,705 100,044 106,342
General and administrative 119,463 2,144,299 234,881 2,406,348
Stock based compensation (Note 8) - 1,547,560 - 427,699
------------ ----------- ----------- ------------
Total operating expenses 148,495 3,967,564 334,925 2,968,212
------------ ----------- ----------- ------------
Net loss from operations (101,297) (3,444,910) (190,571) (2,797,212)
Other income (expense)
Interest expense - (1,114) - (64,506)
Accretion on preferred stock - (91,227) (22,807) (24,439)
------------ ----------- ----------- ------------
- (92,341) (22,807) (88,945)
------------ ----------- ----------- ------------
Net loss $ (101,297) $ (3,537,251) $ (213,378) $ (2,886,157)
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Net loss per common share
Basic and diluted $ (.87) $ (.94) $ (.05) $ (.19)
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Shares used in computing net loss per common share
Basic and diluted 116,250 3,759,050 3,928,015 15,256,675
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
------- ----------- ------- -------
<S> <C> <C> <C> <C>
Balance - June 30, 1997 - $ - 56,298 $ 56
Issuance of common stock for acquisition - - 463,093 463
Sale of common stock - - 100,000 100
Issuance of stock for services - - 78,600 79
Issuance of preferred stock to extinguish debt 20,000 1,276,841 - -
Net loss - - - -
------- ----------- ------- -------
Balance - June 30, 1998 20,000 1,276,841 697,991 698
Accretion on preferred stock (Note 11) - 91,227 - -
Issuance of stock for services - - 12,000 12
Sale of common stock - - 155,144 155
Common stock issued in connection with business
reorganization (Note 3) - - 13,825,000 13,825
Proceeds of private offering (net of offering
costs of $83,095) (Note 12) - - 120,000 120
Proceeds of private offering (net of offering
costs of $359,994) (Note 12) - - 297,785 298
Stock based compensation (Note 13) - - - -
Net loss - - - -
------- ----------- ------- -------
Balance - June 30, 1999 20,000 1,368,068 15,107,920 15,108
Proceeds from Private Offering (net of offering
costs of $95,630) (Note 12) (unaudited) - - 127,935 128
Proceeds from Private Offering (net of offering
costs of $59,382) (Note 12) (unaudited) - - 97,227 97
Accretion on preferred stock (Note 11) (unaudited) - 24,439 - -
Stock issued for acquisition of America's Web (Note 3) (unaudited) - - 28,562 29
Stock based compensation (Note 13) (unaudited) - - 27,707 28
Stock issued for acquisition of Prentice (Note 3) (unaudited) - - 346,667 347
Stock issued for services (unaudited) 17,500 17
Warrants issued in conjunction with bridge loan (Note 9) (unaudited) - - - -
Net loss (unaudited) - - - -
------- ----------- ------- -------
Balance - September 30, 1999 (unaudited) 20,000 $ 1,392,507 15,753,518 $15,754
------- ----------- ------- -------
------- ----------- ------- -------
<CAPTION>
Total
Accumulated Paid-in Stockholders
Deficit Capital Equity
------------- ----------- ------------
<S> <C> <C> <C>
Balance - June 30, 1997 (41,675) $ 41,619 $ -
Issuance of common stock for acquisition - 13,430 13,893
Sale of common stock - 92,400 92,500
Issuance of stock for services - 72,661 72,740
Issuance of preferred stock to extinguish debt - - 1,276,841
Net loss (101,297) - (101,297)
------------- ----------- ------------
Balance - June 30, 1998 (142,972) 220,110 1,354,677
Accretion on preferred stock (Note 11) - - 91,227
Issuance of stock for services - 29,988 30,000
Sale of common stock - 290,403 290,558
Common stock issued in connection with business
reorganization (Note 3) - (13,825) -
Proceeds of private offering (net of offering
costs of $83,095) (Note 12) - 516,785 516,905
Proceeds of private offering (net of offering
costs of $359,994) (Note 12) - 1,724,210 1,724,508
Stock based compensation (Note 13) - 1,547,560 1,547,560
Net loss (3,537,251) - (3,537,251)
------------- ----------- ------------
Balance - June 30, 1999 (3,680,223) 4,315,231 2,018,184
Proceeds from Private Offering (net of offering
costs of $95,630) (Note 12) (unaudited) - 641,242 641,370
Proceeds from Private Offering (net of offering
costs of $59,382) (Note 12) (unaudited) - 387,771 387,868
Accretion on preferred stock (Note 11) (unaudited) - - 24,439
Stock issued for acquisition of America's Web
(Note 3) (unaudited) - 199,902 199,931
Stock based compensation (Note 13) (unaudited) - 305,171 305,199
Stock issued for acquisition of Prentice
(Note 3) (unaudited) - 2,426,322 2,426,669
Stock issued for services (unaudited) 122,483 122,500
Warrants issued in conjunction with
bridge loan (Note 8) (unaudited) - 62,295 62,295
Net loss (unaudited) (2,886,157) - (2,886,157)
------------- ----------- ------------
Balance - September 30, 1999 (unaudited) $(6,566,380) $ 8,460,417 $ 3,302,298
------------- ----------- ------------
------------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended For the Three Months Ended
June 30, September 30,
--------------------------- ----------------------------
1998 1999 1998 1999
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(101,297) $(3,537,251) $(213,378) $(2,886,157)
--------- ----------- --------- -----------
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 30,869 348,708 62,646 117,347
Stock issued for services - 30,000 30,000 122,500
Stock based compensation - 1,547,560 - 305,199
Warrants issued - - - 62,294
Other 1,241 - - -
Accretion on preferred stock - 91,227 22,807 24,439
Changes in assets and liabilities
Accounts receivable (1,551) 12,245 (4,612) (55,074)
Other assets 8,387 (3,880) (2,830) 1,049
Accounts payable (6,315) (14,510) (6,273) 1,072,336
Accrued expenses (14,080) 104,445 (28,049) (103,699)
Other liabilities (9,136) - - -
--------- ----------- --------- -----------
9,415 2,115,795 73,689 1,546,391
--------- ----------- --------- -----------
Net cash used by operating activities
(91,882) (1,421,456) (139,689) (1,339,766)
--------- ----------- --------- -----------
Cash flows from investing activities
Purchase of equipment (2,779) (121,117) (8,911) (164,726)
Cash acquired from acquisitions - - - 85,659
Disposal of leasehold improvements 2,761 - - -
Acquisition costs - - - (554,884)
--------- ----------- --------- -----------
Net cash used by investing activities (18) (121,117) (8,911) (633,951)
--------- ----------- --------- -----------
Cash flows from financing activities
Net activity - due to officer - (16,666) (2,000) (105,163)
Offering costs - - - (100,850)
Payments on short-term notes - - - (127,062)
Proceeds on short-term notes - - - 1,000,000
Proceeds from issuance of common stock 92,500 2,179,305 150,000 1,381,905
--------- ----------- --------- -----------
Net cash provided by financing activities
92,500 2,162,639 148,000 2,048,830
--------- ----------- --------- -----------
Net increase (decrease) in cash 600 620,066 (600) 75,113
Cash at beginning of period - 600 600 620,666
--------- ----------- --------- -----------
Cash at end of period $ 600 $ 620,666 $ - $ 695,779
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
Supplemental disclosure of cash flow information
Cash paid for interest for the years ended June 30, 1998 and 1999 was
$2,387 and $1,411, respectively and $0 and $2,211 for the three months
ended September 30, 1998 and 1999 (unaudited).
See notes to consolidated financial statements.
F-6
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of non-cash investing and financing activities:
During the year ending June 30, 1998, Telecom Wireless Corporation (the
Company) issued 28,600 shares of common stock to pay legal fees of
$71,500 for services involved with the acquisition of Keys Microcable
Corporation (the Subsidiary).
During the year ending June 30, 1998, the Company agreed to issue
20,000 shares of preferred stock to settle the Subsidiary's $1,276,841
credit facility and 30,891 shares of common stock in exchange for an
18% interest held by the minority stockholder in Keys. The Company then
exchanged 432,202 shares of common stock for all of the stock of the
Subsidiary. In exchange for issuing the 432,202 shares of common stock,
the Company received 82% of the shares of the common stock of the
Subsidiary. Thus the Company acquired 100% of the outstanding stock of
Keys.
During the year ended June 30, 1999, the Company acquired 100% of the
outstanding common stock of Phoenix Communications, Inc. (Phoenix).
During the three months ended September 30, 1999, the Company acquired
100% of the outstanding stock of America's Web Station, Inc. (America's
Web) and 90% of the outstanding common stock of Prentice Technologies,
Inc. (Prentice) (Note 3).
See notes to consolidated financial statements.
F-7
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Telecom Wireless Corporation (the Company, formerly Stetson Oil Exchange, Inc.)
was incorporated on April 12, 1984 under the laws of the State of Utah.
Subsequent to incorporation, the Company participated in various ventures;
however, it was dormant for a number of years prior to 1998.
In June 1998, the Company acquired Keys Microcable Corporation (Keys) in a
stock-for-stock exchange that was accounted for as a reverse purchase.
Keys was incorporated on May 2, 1995 under the laws of the State of Florida to
operate a Wireless Cable Television (WCTV) system which serves the Lower Keys of
Florida. It was formed in 1995 to further the venture of Keys Microcable, JV,
the predecessor company in a tax free exchange of interests. To do this, its
majority shareholder, Wireless Development Group, Inc. (formerly Key West
Wireless Partners, G.P. (KWWP), had entered into a Joint Venture Agreement with
Satellite Microcable Corp. (SMC) to jointly develop a WCTV system to serve Key
West and the adjacent Lower Keys (the System).
REORGANIZATION
In April 1999, the Company completed a reorganization through a merger with
Phoenix Communications, Inc. by exchanging 13,825,000 shares of common stock for
all the outstanding common stock of Phoenix. At the time of the merger, Phoenix
had no assets, liabilities, equity or operations. After the merger, Phoenix
shareholders held 94% of the common stock of the Company. The transaction was
accounted for at historical cost as Phoenix was a shell company and acquired
control.
The business plan of the Company involves capitalizing on the convergence on the
Internet of video, voice and data through the acquisition of Internet Service
Providers ("ISPs"), Application Service Providers ("ASPs"), and Competitive
Local Exchange Carriers ("CLECs"). The goal of TWC is to provide broadband
connectivity, content, and electronic commerce via an Internet platform to
residential and business customers in both the United States and abroad.
The Company has acquired, in separate transactions, (the "Transactions") the
stock of one ASP and one ISP subsequent to year end and plans to continue to
acquire companies to expand its operations.
F-8
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPALS OF CONSOLIDATION
The consolidated balance sheet includes the accounts of the parent company,
Telecom Wireless Corporation and its wholly-owned subsidiaries, Keys and
Phoenix, as of June 30, 1999 and America's Web and Prentice as of September 30,
1999 (unaudited) (Note 3). All significant intercompany transactions and
balances have been eliminated.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position of the Company at September 30, 1999
and 1998 and the results of its operations and changes in cash flows for the
three months then ended. The results of operations for the three months ended
September 30, 1998 and 1999 are not necessarily indicative of the results to be
expected for a full year.
PROPERTY AND EQUIPMENT
Equipment is recorded at cost and depreciated by the straight-line method over
the estimated useful lives of the assets ranging from 3 to 9 years. Leasehold
improvements are recorded at cost and amortized by the straight-line method over
the terms of the leases, or the estimated useful lives of the assets.
LICENSE DEVELOPMENT COSTS, SUBSCRIBER LISTS AND GOODWILL
Intangibles are capitalized and amortized utilizing the straight line method.
License development costs are amortized over the life of the license (7 - 8
years), and goodwill is amortized over its economic life of 5 to 8 years, as are
subscriber lists.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs consist of costs associated with the Company's
investigation of potential future acquisitions. These costs will be capitalized
upon completion of the acquisition or charged to expense if the acquisition is
unsuccessful.
DEFERRED OFFERING COSTS
Deferred offering costs represents costs incurred in conjunction with the
Company's equity offering and registration activities. Deferred offering costs
will be offset against net proceeds, if successful, or expensed in operations if
the offering is unsuccessful.
F-9
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company assesses valuation of long-lived assets in accordance with Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be disposed of. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved.
REVENUE RECOGNITION
Wireless T.V. revenue and internet service revenue consists of the monthly fees
charged to subscribers. Subscribers are billed at the beginning of each month
and revenue is recognized as service is provided.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs to date
have not been significant.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET LOSS PER SHARE
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", basic earnings per share is computed by
dividing net income by the number of weighted average common shares outstanding
during the year. Diluted earnings per share is computed by dividing net income
by the number of weighted average common shares outstanding during the year,
including potential common shares. For the years ended June 30, 1998 and 1999
all potential common shares, which included convertible preferred stock and
stock options, were antidilutive and therefore were excluded from these
calculations.
F-10
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130 ("SFAS
130"), COMPREHENSIVE INCOME, for the years ending June 30, 1998 and 1999. There
were no components of comprehensive income; consequently, no separate statement
of comprehensive income has been presented.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable and accounts payable
approximates fair value due to the short term maturity of these instruments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration of
credit risk consist primarily of temporary cash investments. The Company places
its cash investments with high credit quality financial institutions and, by
policy, limits the amount of credit exposure to any one institution. The Company
does, however, on occasion exceed the Federal Deposit Insurance Corporation
federally insured limits.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
During June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No. 133 establishes
new standards by which derivative financial instruments must be recognized in
any entity's financial statements. Besides requiring derivatives to be
included on balance sheets at fair value, Statement No. 133 generally
requires that gains and losses from later changes in a derivative's fair
value be recognized currently in earnings. Statement No. 133 also unifies
qualifying criteria for hedges involving all kinds of derivatives, requiring
that a company document, designate and assess the effectiveness' of its
hedges. Statement No. 133 is required to be adopted by the Company in 2000.
Management, however, does not expect the impact from this statement to have a
material impact on the financial statement presentation, financial position
or results of operations.
F-11
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - GOING CONCERN
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. During the year ended June 30, 1999, the
Company incurred a consolidated net loss of approximately $3,537,000, including
negative cash flow from operations of approximately $1,421,000. Cash
requirements were covered by sales in non-public offerings of the Company's
equity securities.
The Company will require substantial additional funds to satisfy its working
capital requirements and to meet the objectives of its business plan. Management
plans to obtain these funds primarily from debt and equity placements with
institutional investors and wealthy individuals until such time as its cash
requirements can be satisfied from operations. However, no assurance can be
given that the Company will be able to raise sufficient funds from such sources
or to generate sufficient cash flow from operations to meet its working capital
requirements. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
NOTE 3 - ACQUISITIONS
During the year ending June 30, 1998, the Company agreed to issue 20,000 shares
of preferred stock to settle the Subsidiary's $1,276,841 credit facility and
30,891 shares of common stock in exchange for an 18% interest held by the
minority stockholder in Keys.
In June 1998, the Company exchanged 432,202 shares of common stock for the
remaining 82% of the common stock of Keys. Thus the Company acquired 100% of the
outstanding stock of Keys. Keys had the following assets and liabilities that
approximate fair value at the date of the exchange:
<TABLE>
<S> <C>
Accounts receivable $ 60,252
Machinery and equipment 835,711
Leasehold improvements 35,747
Licenses 419,413
-----------
Total assets $ 1,351,123
===========
Accounts payable $ 638,832
Accrued expense 91,907
Credit facility 1,276,841
-----------
Total liabilities 2,007,580
Less preferred stock issued to extinguish debt (1,276,841)
-----------
$ 730,739
===========
</TABLE>
F-12
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (CONTINUED)
In April 1999, the Company completed a reorganization through a merger with
Phoenix Communications, Inc. by exchanging 13,825,000 shares of its common stock
for all the outstanding common stock of Phoenix. At the time of the merger,
Phoenix had no assets, liabilities, equity or operations. After the merger,
Phoenix shareholders held 94% of the outstanding common stock of the Company.
The transaction was accounted for at historical cost as Phoenix was a shell
company and acquired control.
In July 1999 the Company consummated an acquisition of all of the issued and
outstanding common shares of America's Web Station for 28,562 shares of common
stock valued at $199,931 for purposes of the acquisition. The acquisition has
been accounted for as a purchase. The purchase price, including acquisition
costs, was allocated as follows:
<TABLE>
<S> <C>
Cash $ 5,878
Accounts receivable, net 14,893
Property and equipment 53,705
Intangible assets 8,743
Subscriber lists 225,000
Other assets 2,957
---------
311,176
Liabilities assumed (191,814)
---------
119,362
Consideration given and acquisition costs (255,390)
---------
Excess purchase price recorded as goodwill $ 136,028
=========
</TABLE>
Effective September 30, 1999 the Company consummated the acquisition of 90% of
the issued and outstanding common stock of Prentice Technologies, Inc for
346,667 shares of common stock (Note 16) valued at $2,426,669 for purposes of
the acquisition and issued a $253,750 note payable. The note is payable in six
monthly installments of $43,284 including interest at 8% per annum. Payments
were to begin October 23, 1999, however, no payments have been made. In
addition, options were issued under a separate employment contract (Note 13).
The acquisition has been accounted for as a purchase. The purchase price,
including acquisition costs, was allocated as follows:
<TABLE>
<S> <C>
Cash $ 79,781
Accounts receivable, net 581,286
Property and equipment 203,740
Other assets 86,195
-----------
951,002
Liabilities assumed (790,389)
-----------
160,613
Consideration given and acquisition costs (2,754,942)
Minority interest (16,061)
-----------
Excess purchase price recorded as goodwill $ 2,610,390
===========
</TABLE>
F-13
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (CONTINUED)
The following unaudited pro forma data summarized the results of operations for
the year indicated as if the acquisition of America's Web and Prentice
Technologies had been completed as of the beginning of the period presented. The
proforma data gives effect to actual operating results prior to the acquisition,
adjusted to include depreciation of fixed assets, amortization of intangibles
and additional interest expense.
These pro forma amounts do not purport to be indicative of the results that
would have actually been obtained if the acquisitions occurred as of the
beginning of the periods presented of that may be obtained in the future.
<TABLE>
<S> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999 (A)
Revenues $ 882,432
Net (loss) $(2,930,270)
Basic and diluted (loss) per share
$ (.19)
YEAR ENDED JUNE 30, 1999
Revenues $ 2,664,886
Net (loss) $(4,227,468)
Basic and diluted (loss) per share
$ (1.02)
</TABLE>
(A) The figures for America's Web for the one month ended July 31, 1999
have been excluded as they are immaterial for this presentation.
NOTE 4 - PROPERTY AND EQUIPMENT
Major classes of property and equipment are as follows.
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
--------- -------------
<S> <C> <C>
Service center property and equipment
Office equipment and computer $ 61,091 $408,066
Furniture and fixtures 14,696 82,524
-------- --------
75,787 490,590
-------- --------
</TABLE>
F-14
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
----------- ------------
<S> <C> <C>
Wireless television plant
Machinery and equipment 61,752 29,109
Leasehold improvement headend 35,535 35,535
TV transmission equipment 314,387 350,938
Test equipment 26,879 42,057
Subscriber recoverable equipment 121,502 121,502
Subscriber non-Recoverable Equipment 45,997 45,997
Vehicles and Equipment 49,261 107,588
Engineering 10,164 51,623
----------- ------------
665,477 784,349
----------- ------------
Total property and equipment 741,264 1,274,939
Less accumulated depreciation (151,467) (316,527)
----------- ------------
$ 589,797 $ 958,412
=========== ===========
</TABLE>
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1999
-------- -------------
<S> <C> <C>
Accrued lawsuit settlements $ 97,000 $ 23,000
Accrued payroll costs 43,703 39,964
-------- --------
$140,703 $ 62,964
======== ========
</TABLE>
NOTE 6 - LINE-OF-CREDIT
Prentice has available a $75,000 line-of-credit with interest at 2.9% over prime
(totaling 10.65% at June 30, 1999). The line has no stated maturity and is
personally guaranteed by the minority stockholder of Prentice. At September 30,
1999, $60,043 was borrowed against the line.
F-15
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTE PAYABLE - FINANCING AGREEMENT
During 1999, Prentice entered into an agreement to transfer certain of its
accounts receivable with recourse to a finance company. Inventory, equipment,
accounts receivable and intangible assets collateralized the agreement. The
finance company advances 80% of the account receivable upon submission and
remits the remaining 20% less interest and fees when the account is paid by the
customer. In addition, Prentice is at risk for credit losses associated with
sold receivables and provides for such in its financial statements. The
receivables and related note payable are reflected in the Company's balance
sheet.
NOTE 8 - LEASE OBLIGATIONS
The Company leases certain telecommunications and technology equipment under an
operating lease agreement. The Company has leased equipment for the purpose of
expanding its Internet capabilities. The equipment presently is in storage in
Albuquerque, New Mexico. Lease payments on this equipment aggregate
approximately $45,780 per month and will commence in November, 1999.
The future minimum rental payments due under the lease agreements are as
follows:
<TABLE>
<CAPTION>
Year Ending June 30
-------------------
<S> <C>
1999 (nine months remaining) $ 309,179
2000 549,360
2001 549,360
-----------
Total $ 1,407,899
===========
</TABLE>
NOTE 9 - SHORT-TERM NOTES PAYABLE
On September 1, 1999, the Company obtained various bridge loans totaling
$250,000. The loans bear interest at 10% per year with principal and interest
due and payable in full on the earlier of (a) October 31, 1999 or (b) the date
of the receipt by the Company of financing aggregating at least $2,000,000.
These loans are personally guaranteed by a shareholder of the Company.
On September 23, 1999, the Company obtained various bridge loans totaling
$750,000. The loans bear interest at 10% per year with principal and interest
due and payable in full on the earlier of (a) November 23, 1999 or (b) the date
of the receipt by the Company of financing aggregating at least $2,000,000.
F-16
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHORT-TERM NOTES PAYABLE (CONTINUED)
Attached to these loans are warrants for the purchase of 100,000 shares of
the Company's common stock at $7 per share. These warrants terminate after
four years or the date on which a registration statement relating to the
shares underlying the warrants has been in effect for two years. If the loans
are not repaid in full within one month of the date of issuance, the lenders
are entitled to receive an additional 100,000 warrants subject to the same
terms as the repricing warrants issued in conjunction with the private
placements discussed in Note 12. The Company also issued warrants for the
purchase of 300,000 shares at an exercise price of $.001. The Company will
recognize approximately $2,000,000 of interest expense in the first quarter
of fiscal year 2000 related to these warrants. (Note 13)
In connection with the acquisition of Prentice Technologies, the Company
signed a $253,750 note payable, due March 2000 and with principal and
interest of $43,284 payable monthly. Interest is calculated at 8% per annum.
The Company has not made any payments on this note.
The Company assumed notes payable in conjunction with the acquisition of
America's Web which are due on demand. Interest is calculated at 7% - 19% per
annum and the notes are unsecured.
NOTE 10 - NOTE PAYABLE
The Company assumed a note with a financial institution in conjunction with
the acquisition of America's Web. Payments of $364, including interest at
8.9%, are due monthly and the note is collateralized by a vehicle. The note
matures in April 2002.
Note payable matures as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
2000 $ 5,662
2001 5,662
2002 2,110
-------
$13,434
=======
</TABLE>
F-17
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - PREFERRED STOCK
AGREEMENT WITH MINORITY SHAREHOLDER
As of June 10, 1998, JRHW17 Corporation (owned by the three minority
shareholders of Keys) had advanced Keys $1,276,841. On that date, the Company
entered into an agreement with JRHW17 Corporation to cancel this debt for
consideration of 20,000 shares of the Company's $100 par value Class H
Non-voting, Convertible Preferred Stock, which has not been issued as of
September 30, 1999. The 20,000 shares of Class H stock shall be redeemable by
the Company at par value if not previously converted, provided that the
Company shall not exercise its redemption right prior to January 1, 2005.
Class H preferred stock shall be convertible to common stock of the Company
upon the filing of a Registration Statement with the Securities and Exchange
Commission (SEC) for a public offering of shares of the Company. One half of
the shares issuable upon exercise of the conversion will have "piggyback"
registration rights on the first public offerings, the remaining shares
resulting from the conversion will have registration rights on the next
subsequent or secondary offering. Subject to approval of the regulatory
authorities and the underwriters, the Class H shares will convert to common
stock of the Company on the following basis: the conversion rate will be
determined at the time of the public offering by first taking 125% of the
price at which a share of the Company's common stock will be offered to the
public. This number so calculated will be the divisor and the par value per
share of Class H stock (i.e., $100.00) will be the dividend and the quotient
will then be the number of common shares into which each share of Class H
stock will be convertible. The common stock received upon conversion by the
Class H stockholder, subject to the foregoing registration rights, shall be
restricted pursuant to SEC Rule 144 and shall contain a legend on each
certificate to that effect.
NOTE 12 - PRIVATE PLACEMENTS
In April 1999, the Company privately placed 120,000 shares of its common
stock at a price of $5 per share. The company received proceeds of $516,905
net of related costs of $83,095.
In May 1999, the Company privately placed 297,786 shares of its common stock
accompanied by registration rights at a price of $7.00 per share. Proceeds to
the company aggregated $1,724,508, net of $359,994 in offering costs. In July
1999, $352,666 of the proceeds were received and are reflected as a stock
subscription receivable as of June 30, 1999.
F-18
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PRIVATE PLACEMENTS (CONTINUED)
In connection with the May 1999 private placement, the Company also issued a
warrant to Thomson Kernaghan & Co., Ltd., a Canadian broker-dealer that acted
as co-placement agent, for the purchase of 45,000 shares of common stock at
an average exercise price of $7.25 per share expiring June 8, 2002. In
addition, the company issued warrants for the benefit of the purchasers in
the name of Thomson Kernaghan & Co., Ltd., as Agent, for allocation by it as
placement agent, for the purchase of 27,000 shares of common stock at an
exercise price of $7.00 per share expiring on June 8, 2002.
In August 1999, the Company privately placed 105,285 shares of its common
stock accompanied by registration rights at a price of $7.00 per share.
Proceeds to the Company aggregated $641,242 net of $95,630 in offering costs.
The Company issued 22,650 shares of stock to the placement agent.
In September 1999, the Company privately placed 63,893 shares of its common
stock accompanied by registration rights at a price of $7.00 per share.
Proceeds to the Company aggregated $447,250 net of $59,383 in offering costs
in a private placement. In addition, the Company issued an additional 33,334
shares to one investor in a private placement at no additional cost for
failure to meet certain obligations.
The purchasers of restricted shares of the company's common stock in certain
private placements acquired certain registration rights in connection with
their purchases. The rights include a right to require the company, at its
cost, to file by specified deadlines registration statements covering such
common stock and the shares issuable upon exercise of the repricing warrants
issued in connection with the purchases of the common stock. If a
registration statement is not declared effective within 90 days after the
relevant filing deadline, the company may be obligated to pay a cash penalty
equal to 2% per month of the final amount of the completed offering until the
registration statement is declared effective. The filing deadline was August
31, 1999, with respect to $737,000; September 30, 1999, with respect
$447,250; and an unknown date with respect to $2,084,495.
The repricing warrants entitle the holder to purchase, at an exercise price
of $.001 per share, that number of shares as equals the number of shares
purchased by that holder multiplied by a fraction the numerator of which is
$8.75 minus the average closing bid prices of the common stock during the
twenty (20) days following the effective date of the registration statement,
and the denominator of which is the average closing bid prices of the common
stock during the twenty (20) days following the effective date.
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS
CONSULTING AGREEMENT
On June 18, 1998 the Company entered into an option agreement with the former
minority shareholder of Keys under which the shareholder has the right to
purchase a number of shares of Company's common stock equal to $400,000
divided by the exercise price of the option. The exercise price of the
options is calculated as the lower of 50% of the closing bid price of the
shares on the trading day immediately prior to the exercise date or 50% of
the opening bid price on the next trading day. The options expire in June
2002. No options related to this agreement had been exercised as of September
30, 1999.
As a part of a June 1, 1998 agreement with a consultant, the Company granted
the consultant an irrevocable common stock purchase option exercisable for an
aggregate of 185,000 shares of common stock of the Company through June 2001.
The consultant may exercise the option as follows: 5,000 options are
exercisable at an exercise price of $2.50 per option, provided that the bid
price of the Company's common stock shall be at least $5.00 per share at the
date of exercise; 80,000 options are exercisable at an exercise price of
$3.75 per option, provided that the bid price of the Company's common stock
shall be at least $7.50 per share at the date of exercise; and 100,000
options are exercisable at an exercise price of $5.00 per option, provided
that the bid price of the Company's common stock shall be at least $10.00 per
share at the date of exercise.
F-19
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
CONSULTING AGREEMENT (CONTINUED)
In early 1999 two current officers of the Company of the company, entered
into a management agreement through an entity controlled by them whereby they
were to receive a 50% equity interest in Keys in consideration of the
performance of management services. At that time, these officers were not
associated with the Company, so that the agreement was negotiated at arms'
length. However, this agreement was terminated, after partial performance, in
connection with the Phoenix Communications share exchange (Note 3). A
settlement of the Company's obligations under this agreement has been made
for the issuance of 123,222 warrants to purchase common stock of the Company
at an exercise price of $5.275 per share. The fair value of these options
based upon the Black-Scholes pricing model was $212,560 and has been
reflected in the accompanying financial statements for the year ended June
30, 1999.
EMPLOYMENT AGREEMENT
In conjunction with one of the officer's employment agreement, 350,000 stock
options were granted in August 1999. All options are subject to achieving
certain performance criteria over a three year period. 175,000 of the options
have an exercise price of $0.10 and 175,000 options have an exercise price
$7.73. No compensation expense has been reflected in the accompanying
financial statements due to the uncertainty of meeting the performance
criteria.
1999 STOCK OPTION PLAN
In 1999, the Company adopted its Amended and Restated 1999 Stock Option and
Restricted Stock Plan (the Plan). The total number of shares of the Company's
common stock that may be issued to grantees and recipients under the plan is
800,000. The plan allows issuance of both qualified (or incentive) options
and non-qualified options as well as shares of restricted stock (stock
awards). Options and stock awards may be granted to employees, independent
contractors, officers, directors and consultants at the discretion of the
Board of Directors or a committee to be appointed by the Board of Directors.
No grant may be made under the 1999 Plan after ten years, but awards granted
prior to that time may extend beyond it. Unless otherwise fixed by the
committee that governs the Plan, the term of an option will be five years
from the date of grant, but no option may have a term of more than ten years
from the date of grant.
Options granted under the plan vest 20% at the end of each of the five years
of service following the grant date. The Board of Directors of the Company
may specify terms and conditions other than those noted above. During 1999,
options to purchase 83,868 shares were issued under this plan to employees
with exercise prices from $7.73 to $13.53, and none were vested as of June
30, 1999. The exercise prices of the options were greater than the fair value
of the commons stock on the date of grant. As the Company has adopted the
disclosure only provisions of the Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation," no compensation expense
has been recognized related to those options.
F-20
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees; and complies with the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation. Under
APB No. 25, compensation cost, if any, is recognized over respective vesting
periods based on the difference, on the date of grant, between the fair value
of the Company's common stock and the grant price.
During 1999, the Company issued options to purchase 5,584,414 shares to
several employees of the Company. The fair value of the common stock on the
dates of issuance was $7 and the exercise prices are between $2.55 and
$10.55. Approximately $1,548,000 and $111,250 in compensation expense is
included in the June 30, 1999 and September 30, 1999 financial statements,
respectively. This expense is to reflect options granted to employees with
exercise prices below fair value on the date of grant.
The company issued 27,707 shares of common stock to employees of Prentice
which were valued at $7 per share for a total of $193,949. This expense has
been reflected as stock based compensation in the financial statements for the
three months ended September 30, 1999.
Had compensation cost for stock-based compensation been determined based on
the fair value or the grant date consistent with the method of SFAS 123, the
Company's net income and earnings per share would not have been reduced due
to (1) either the fair value of grants to employees at greater than fair
market value had no fair value based upon calculating the fair value
utilizing the Black-Scholes option pricing model or (2) the fair value of the
options will be reflected over the time of services to be rendered which will
correlate the individual employee's vesting schedule and no options vested in
the current year.
The fair value of the option grants is estimated on the date of grant
utilizing the Black-Scholes options pricing model with the following
assumptions for 1998 and 1999, respectively: expected life of 4 to 10 years,
0% volatility, risk free interest rate of 5.5%, and a 0% dividend yield.
F-21
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
Summarized information relating to stock options is as follows:
The following is a summary of options and warrants granted, exercised and
expired:
<TABLE>
<CAPTION>
Currently Exercisable
---------------------------------------------
Weighted Average Weighted Average
Exercise Price of Exercise Price of
Options and Options and
Options Warrants Warrants Options Warrants Warrants
--------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding June 30, 1997 - -
Granted 350,090 - $ 4.00
Exercised - -
--------- --------
Outstanding June 30, 1998 350,090 - 4.00 350,090 - $ 4.00
-------- --------
Granted 5,545,060 195,222 9.69 308,132 72,000 3.90
-------- --------
Exercised - -
Cancelled (115,090) -
--------- --------
Outstanding June 30, 1999 5,780,060 195,222 9.50 535,000 195,222 4.17
-------- --------
Granted 950,000 280,487 9.69 278,125 2,362
-------- -------- 9.69
Exercised - -
Cancelled - -
--------- --------
Outstanding
September 30, 1999 6,730,060 475,709 $ 9.53 936,347 74,362 $ 4.89
========= ======== ======== ========
</TABLE>
F-22
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
Options and Warrants
Options and Warrants Outstanding Exercisable
------------------------------------ ----------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Number Exercise
Outstanding Price Life Exercisable Price
----------- -------- ----------- ----------- ---------
Range of Options
and Warrants
Exercise Price
- -----------------
<S> <C> <C> <C> <C> <C>
JUNE 30, 1999
$2.55 - $7.73 1,130,222 $ 4.86 7.38 680,222 $ 3.88
$10.00 - $13.53 4,845,060 10.56 4.75 50,000 8.00
SEPTEMBER 30, 1999
$2.55 - $7.73 1,760,709 5.05 6.26 455,487 4.22
$10.00 - $13.53 5,445,060 $ 10.98 4.55 775,000 $ 12.91
</TABLE>
The weighted average exercise prices for the options and warrants granted are
as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Number of Grant Date Fair
Options Warrants Value
--------- --------- ---------------
<S> <C> <C> <C>
Granted during the year ended June 30, 1998
Less than fair value 350,090 - $ 1.00
Equal to fair value - - -
Greater than fair value - - -
--------- ----------
350,000 -
========= ==========
Granted during the year ended June 30, 1999
Less than fair value 400,000 123,222 $ 3.81
Equal to fair value - 42,000 1.05
Greater than fair value 5,145,060 30,000 -
--------- ----------
5,545,060 195,222
========= ==========
Granted during the period ended September 30, 1999
Less than fair value 175,000 30,000 $ 6.33
Equal to fair value - 250,487 1.40
Greater than fair value 775,000 - .25
--------- ----------
950,000 280,487
========= ==========
</TABLE>
F-23
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STOCK SPLITS
The Company approved a 1 for 5 reverse stock split to be effective May 3,
1999. The par value was changed from .006 per share to .001 per share.
All share and per share amounts have been restated to reflect the above stock
splits.
NOTE 15 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the Company
has incurred net operating losses through September 30, 1999. The following
table sets forth the primary components of:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
June 30, September 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 690,000 $ 1,330,000 $ 762,000 $ 1,659,000
Valuation allowance (690,000) (1,330,000) (762,000) (1,659,000)
----------- ----------- ----------- -----------
$ - $ - $ - $ -
=========== =========== =========== ===========
</TABLE>
At June 30, 1998 and 1999 and September 30, 1998 and 1999, the Company fully
reserved its deferred tax assets. The Company believes sufficient uncertainty
exists regarding the reliability of tax assets such that a full valuation is
appropriate.
At September 30, 1999, the Company had approximately $4,850,000 of federal
net operating loss carryforwards for tax reporting purposes available to
offset future taxable income subject to certain limitations due to change in
control. These net operating losses expire through 2009.
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES
LICENSE RIGHTS
A Joint Venture affiliate of Keys, Satellite Microcable Corporation, has
negotiated lease agreements with ten third-party FCC commercial WCTV (Note 1)
license holders for exclusive use of their licenses for the purpose of
broadcasting WCTV transmissions. As of September 30, 1999, operation of some
channels are under STA (Special Temporary Authority) pending issuance of
permanent licenses.
EMPLOYMENT CONTRACTS
The Company entered into various employment agreements with certain officers
for terms of three years each, expiring March 31, 2002. The agreements call
for a minimum annual salary with increases based on annual review by the
compensation committee. If the Company terminates the employment agreement
without cause, the Company will be obligated to pay the base salary for the
remainder of the initial term.
F-24
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
IDLE EQUIPMENT
The Company purchased 15 transmitters which are not in current use. The
Company has negotiated acceptable terms for return of transmitters to the
seller. The asset is being carried at approximately $175,000, and the Company
owes approximately $210,000 on the transmitters as of September 30, 1999. The
seller has agreed to refund the full purchase price less damage, if any,
handling and shipping upon return of the equipment.
OFFICE SPACE AND TRANSMISSION TOWERS
Keys entered into a lease agreement for the non-exclusive use of a transmission
tower and the exclusive use of the space within a building which contains
satellite signal receiving equipment. The current lease period has expired as so
the lease is on a month to month basis. Keys has the option to renew the lease
for two additional five year periods. The Company is responsible for its
proportionate share of operating expenses, utilities, insurance and taxes.
On June 1, 1998, Keys entered into a lease agreement expiring May 31, 2001 for
office space in Key West, Florida, at $2,040 per month. This lease is subject to
increases based on the Consumer Price Index and has an option to renew for a
three year period.
On July 30, 1999, the Company entered into a lease agreement for office
facilities in West Palm Beach, Florida. The agreement, expiring July 31, 2004,
requires base monthly rental payments of $8,369, plus operating expenses, with a
4% annual increase in the base. The Company is responsible for its prorated
share of operating expenses, taxes, utilities and insurance on all office
spaces. The Company is currently in default on this lease.
Prentice leases office space under a non-cancelable operating lease which
expires 2002. Operating expenses and taxes are paid by Prentice. The Company
sub-leases a portion of this space under an oral agreement. The monthly rental
payment for September 1999 was $15,598 and increase during the term of the
lease.
Total annual minimum base rent commitments are as follows:
<TABLE>
<CAPTION>
For the Year Ended June 30,
---------------------------
<S> <C>
2000 (9 months remaining) $ 291,594
2001 517,447
2002 498,211
2003 502,513
2004 214,502
Thereafter 9,782
----------
Total $2,034,049
----------
----------
</TABLE>
F-25
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
OFFICE SPACE AND TRANSMISSION TOWERS (CONTINUED)
Total rent expense for the years ended June 30, 1998 and 1999 was $17,053 and
$61,700, respectively and $16,246 and $88,132 for the three months ended
September 30, 1998 and 1999, respectively.
LITIGATION
The Company is subject to various lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material adverse effect on the Company's financial position and all suits
filed against the Company during the past year have been settled and are
properly accrued in the accompanying financial statements.
SERVICES AGREEMENT
In August 1999, the Company entered into a Services Agreement with a consultant.
The Services Agreement requires that the consultant render financial consulting
and other services to the Company. As consideration, the Company issued to the
consultant two stock purchase warrants. The first is for the purchase of 500,000
shares of the Company's common stock at an exercise price of $5.50 per share,
which has a fair value of approximately $4,600,000. The second is for the
purchase of 720,000 shares of the Company's common stock which vests at the rate
of 15,000 shares per month for 48 consecutive months, which has an aggregate
fair value of approximately $5,900,000. The exercise price for each installment
is 50% of the market value (as defined) of the Company's common stock on the
vesting date for that installment. For this purpose, market value is deemed to
be the average of the closing prices for the 20 trading days preceding the
vesting date of the installment. In the event of a change in control (as
defined), an additional number of installments shall vest and become exercisable
as equals the number of previously vested installments and the number of shares
included in each monthly installment will double.
PLACEMENT AGENT AGREEMENT
In March 1999, the Company entered into an agreement whereby a placement
agent agreed to research and find sources for the Company's various needs of
financing and to make introductions to persons capable of providing such
financing to the Company. If any person introduced to the Company by the
agent provides any investment capital or other types of financing, the
Company is obligated to pay the agent 10% of the first $10,000,000 of
capital, 7.5% of the following $5,000,000 of capital, and 5% of any balance.
The fee is payable in cash at closing. The Company also agreed to pay the
agent a non-accountable project expense fee in the amount of 1% of the
financing.
In addition, the Company agreed to issue five-year warrants to the agent for
the purchase of up to five shares of the Company's common stock for each $100
of funds raised at an exercise price equal to 85% of the fair market value of
the Company's common stock for the 20 trading days prior to closing of the
financing. The holders of the warrants were granted "piggyback" registration
rights with respect to the underlying shares and the Company agreed to pay
all costs of registration. As of September 30, 1999, the Company had issued
warrants for the purchase of up to 150,487 shares of its common stock to the
agent and its affiliates and 22,650 shares of common stock to the agent and
its affiliates. The fees earned under this agreement are included in the
offering costs reflected in these financial statements.
OTHER AGREEMENTS
In August 1999, the Company entered into an agreement with an individual giving
him the right, exercisable at any time until February 1, 2000, to cause the
Company to purchase from him a total of 2,600,000 shares of the capital stock of
International Datacasting Corporation, a Canadian corporation based in Ottawa,
Ontario, Canada ("IDC"). The purchase price is CDN $1.00 per share in cash or,
at the option of the seller, in the form of a note or the equivalent value of
the Company's common stock. In addition, the Company agreed to purchase from the
seller an additional 2,000,000 shares of IDC common stock upon the same terms
within 30 days after the date of the first purchase. To the extent the seller
elects to take shares of the Company's common stock in payment for the IDC
stock, the stock will be valued at the lower of US $5.00 per share or 70% of the
market price on the date of the transaction. IDC is a public Canadian company
whose stock is traded on the Montreal Stock Exchange (symbol:IDA).
F-26
<PAGE>
(Information with respect to September 30, 1998 and 1999 is Unaudited)
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
OTHER AGREEMENTS (CONTINUED)
In August, the Company agreed to enter into a financial consulting agreement
with the same individual to provide financial review, analysis and consulting
services to the Company for a period of one year. As consideration, the Company
agreed to issue to the consultant a three-year warrant for the purchase of
100,000 shares of the Company's common stock at an exercise price of $6.25 per
share. The fair value of these warrants is approximately $170,000 and will be
recognized ratably over his period of service. The Company can terminate the
financial consulting agreement at any time upon the giving of ten days' written
notice.
In April, 1999 the Company entered into a one-year agreement with a consultant
for various public relations services in exchange for shares of the Company's
common stock. The first payment of 17,500 shares was made in July, 1999. An
additional 17,500 shares are required to be issued since the Company elected to
continue these services. The Company will be impacted in the first quarter of
its 2000 fiscal year by approximately $122,000 of compensation expense for the
three months ended September 30, 1999.
In conjunction with the Prentice acquisition, the Company and the minority
shareholder of Prentice agreed to take all commercially reasonable best
efforts necessary to release the minority shareholder from his personal
guaranty of Prentice obligations by September 22, 2001. The Company deposited
200,000 shares of its common stock into an escrow account to provide a source
of funds to reimburse the minority shareholder if he is required to pay any
of the guaranteed obligations. These shares will be returned to the Company
to the extent the guaranteed obligations are released or satisfied, or when
the agreements underlying such obligations are terminated. The shares are not
reflected as outstanding becuase the Company believes that these conditions
will be satisfied.
NOTE 17 - SUBSEQUENT EVENTS
On November 16, 1999, the minority shareholder of Prentice presented the Company
with a request to rescind its purchase of 90% of the common stock of Prentice by
the Company. The minority shareholder alleges that the Company made material
misrepresentations and/or failed to disclose material information in connection
with the transaction. In addition, he seeks a substantial amount of money.
Management denies the allegations and intends to vigorously defend any legal
proceedings which may result from these claims.
UNAUDITED
PURCHASE AGREEMENT
In September 1999, the Company entered into agreements to acquire a small
equity interest in each of two entities for $1.6 million in cash and 500,000
shares of the Company's common stock with registration rights. The Company
paid $700,000 in October, 1999 (financed with borrowed funds under a
convertible promissory note due in May 2000) and the balance is due in
installments ending in June 2000. Concurrently, the Company entered into a
five-year license that purports to obligate the Company to place a purchase
order for equipment backed by a non-cancelable letter of credit. The Company
has not delivered the 500,000 shares. The seller/licensor has given notice of
default and termination of the right to purchase the equity interest in one
of the entities and the license agreement. Title to the equity interest in
the other entity has been delivered to the Company. In addition, the
seller/licensor claims the Company is obligated to pay the additional
$900,000.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
SYS-Group, Inc. d/b/a Prentice Technologies, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of SYS-Group, Inc. d/b/a Prentice
Technologies, Inc. as of December 31, 1998 and the related statements of
operations, stockholder's equity and cash flows for the years ended December 31,
1997 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SYS-Group, Inc. d/b/a Prentice
Technologies, Inc. as of December 31, 1998 and the results of its operations and
its cash flows for the years ended December 31, 1997 and 1998 in conformity with
generally accepted accounting principles.
As described in Note 7 to the financial statements, a significant part of the
Company's business is dependent on one customer and loss of this customer could
have a materially adverse effect on the Company.
Ehrhardt Keefe Steiner & Hottman PC
May 26, 1999
Denver, Colorado
F-28
<PAGE>
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 14,273 $104,156
Accounts receivable (Note 5) 213,270 416,604
-------- --------
Total current assets 227,543 520,760
Property and equipment, net (Notes 2, 4 and 5) 150,369 181,499
Other assets (Note 5) 8,711 51,648
Advance to shareholder - 30,000
-------- --------
Total assets $386,623 $783,907
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line-of-credit (Note 3) $ 69,936 $ 63,055
Financing agreement (Note 5) - 218,924
Accounts payable 99,897 51,901
Accrued liabilities - 18,504
Current portion of capital lease obligations (Note 4) 27,110 44,345
Deferred revenue - 7,500
Deferred rent expense - 124,413
-------- --------
Total current liabilities 196,943 528,642
Capital lease obligations less current portion (Note 4) 76,582 91,412
-------- --------
Total liabilities 273,525 620,054
-------- --------
Commitments (Note 7)
Stockholder's equity
Common stock, no par value, 1,000,000 shares authorized; 600,000 shares
issued and outstanding 1,000 1,000
Retained earnings 112,098 162,853
-------- --------
113,098 163,853
-------- --------
Total liabilities and stockholder's equity $386,623 $783,907
-------- --------
-------- --------
</TABLE>
See notes to financial statements.
F-29
<PAGE>
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
For the Years Ended Six Months Ended
December 31, June 30,
---------------------------- -----------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue
Consulting income (Note 8) $ 384,847 $ 1,197,801 $ 457,312 $ 1,251,325
----------- ----------- ----------- -----------
Direct expenses
Salaries and other direct expenses 158,271 563,550 146,565 549,371
Referral fees 54,563 132,999 40,782 218,218
----------- ----------- ----------- -----------
Total direct expenses 212,834 696,549 187,347 767,589
----------- ----------- ----------- -----------
Gross profit 172,013 501,252 269,965 483,736
General, administrative and selling expenses
70,583 303,736 130,463 391,627
Research and development - 45,068 5,136 74,335
----------- ----------- ----------- -----------
Income from operations 101,430 152,448 134,366 17,774
----------- ----------- ----------- -----------
Other income (expense)
Interest and other income - 7,213 - 47,887
Interest expense (297) (10,928) (3,723) (14,906)
----------- ----------- ----------- -----------
Total other income (expense) (297) (3,715) (3,723) 32,981
----------- ----------- ----------- -----------
Net income before taxes 101,133 148,733 130,643 50,755
Pro forma income tax provision (Note 6) 37,000 55,000 49,000 19,000
----------- ----------- ----------- -----------
Pro forma net income $ 64,133 $ 93,733 $ 81,643 $ 31,755
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements
F-30
<PAGE>
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock
-------------------------
Retained
Shares Amount Earnings
------- --------- ---------
<S> <C> <C> <C>
Balance - December 31, 1996 600,000 $ 1,000 $ 9,739
Stockholder distributions - - (58,488)
Net income - - 101,133
------- --------- ---------
Balance - December 31, 1997 600,000 1,000 52,384
Stockholder distributions - - (89,019)
Net income - - 148,733
------- --------- ---------
Balance - December 31, 1998 600,000 1,000 112,098
Net income (unaudited) - - 50,755
------- --------- ---------
Balance - June 30, 1999 (unaudited) 600,000 $ 1,000 $ 162,853
------- --------- ---------
------- --------- ---------
</TABLE>
See notes to financial statements.
F-31
<PAGE>
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
For the Years Ended Six Months Ended
December 31, June 30,
------------------------ ------------------------
1997 1998 1998 1999
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 101,133 $ 148,733 $ 130,643 $ 50,755
--------- --------- --------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation - 20,899 7,421 33,322
Deferred rent expense - - - 124,413
Changes in assets and liabilities
Accounts receivable (84,539) (118,992) (9,954) (203,334)
Prepaid expenses (5,270) 5,270 5,270 3,000
Accounts payable 63,597 36,300 (12,701) (47,996)
Accrued liabilities - - - 18,504
Deferred revenue - - - 7,500
--------- --------- --------- ---------
(26,212) (56,523) (9,964) (64,591)
--------- --------- --------- ---------
Net cash provided (used) by operating activities 74,921 92,210 120,679 (13,836)
--------- --------- --------- ---------
Cash flows from investing activities
Increase in other assets (8,711) - - (45,937)
Purchases of property and equipment (7,775) (41,592) - (10,736)
--------- --------- --------- ---------
Net cash used by investing activities (16,486) (41,592) - (56,673)
--------- --------- --------- ---------
Cash flows from financing activities
Distributions to stockholder (63,040) (89,019) (61,266) -
Payments of capital lease obligations (947) (17,262) (6,585) (21,651)
Financing agreement, net - - - 218,924
Line-of-credit, net - 69,936 - (6,881)
Advance to shareholder - - - (30,000)
--------- --------- --------- ---------
Net cash (used) provided by financing activities (63,987) (36,345) (67,851) 160,392
--------- --------- --------- ---------
Net increase (decrease) in cash (5,552) 14,273 52,828 89,883
Cash at beginning of period 5,552 - - 14,273
--------- --------- --------- ---------
Cash at end of period $ - $ 14,273 $ 52,828 $ 104,156
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Supplemental disclosure of cash flow information
Cash paid for interest for the years ended December 31, 1997 and 1998
was $297 and $10,492, respectively, and for the six months ended June
30, 1998 and 1999 was $3,723 and $15,285, respectively (unaudited).
During the years ended December 31, 1997 and 1998, the Company acquired
assets under capital leases totaling $11,860 and $110,041,
respectively, and $46,668 and $53,716 for the six months ended June 30,
1998 and 1999, respectively (unaudited).
See notes to financial statements.
F-32
<PAGE>
(Information with respect to June 30, 1998 and 1999 is Unaudited)
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The Sys-Group, Inc. was incorporated in January 1994 under the laws of Texas.
The Company was doing business as The Enterprise Systems Group, Inc. from
January 1994 to January 1999 and has operated as Prentice Technologies, Inc.
since January 1999. In August 1999, the Company changed its legal name to
Sys-Group, Inc. (the Company). The Company provides computer related services
including enterprise application hosting and relating consulting services to
businesses in the United States, Canada and Europe.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position of the Company at June 30, 1999 and the
results of its operations and changes in cash flows for the six months ended
June 30, 1999 and 1998. The results of operations for the six months ended June
30, 1999 and 1998 are not necessarily indicative of the results to be expected
for a full year.
CONCENTRATION OF CREDIT RISK
The Company grants credit in the normal course of business to customers in the
United States, Canada and Europe. The Company periodically performs credit
analysis and monitors the financial condition of its customers to reduce credit
risk.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost while equipment under capital lease
is stated at the lower of fair value or net present value of minimum lease
payments at the inception of the lease. Depreciation and amortization are
computed on the straight-line method over the estimated lives ranging from three
to five years.
DEFERRED RENT
For financial reporting purposes, rent expense is recorded on a straight-line
basis over the terms of the respective lease. Differences between rent expenses
recorded in the accompanying financial statements and the actual payments made
under each lease is recorded as deferred rent.
F-33
<PAGE>
(Information with respect to June 30, 1998 and 1999 is Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)
REVENUE AND COST RECOGNITION
The Company generates revenue with both hourly-rate and fixed price contracts.
Revenue generated from hourly-rate contracts is recognized as costs are billed
to the customer. Revenue is determined by the contract billing rates and the
time incurred to perform the service plus reimbursable expenses. Expense is
determined by actual cost incurred. Revenue generated from fixed price contracts
is recognized when the contract is completed. The contract is considered
complete when all costs, except for insignificant amounts, have been incurred.
Revenue received in advance of being earned is deferred until earned.
RESEARCH AND DEVELOPMENT
Research and development costs related to both present and future products are
charged to operations in the year incurred.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under these provisions, the Company is not subject to
income taxes as a separate entity. Income or loss of the Company is required to
be included in the income tax returns of the stockholders.
Included in the statement of operations are compiled pro forma income tax
adjustments computed using the statutory rates in effect, which represents the
estimated federal and state tax provisions that would have been required had the
Company been taxed as a C-corporation. The Company's effective statutory rate
based on the pretax income was 37% for all 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, receivables and
accounts payable approximate their fair values as of December 31, 1998 and June
30, 1999 because of the relatively short maturity of these instruments.
F-34
<PAGE>
(Information with respect to June 30, 1998 and 1999 is Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
PRINCIPLES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts of capital lease obligations and debt outstanding also
approximates their fair values as of December 31, 1998 and June 30, 1999 because
interest rates on these instruments approximate the interest rate on debt with
similar terms available to the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS No. 133 addresses the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. SFAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. This statement currently has no impact on
the financial statements of the Company, as the Company does not hold any
derivative instruments or participate in any hedging activities.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- ---------
(Unaudited)
<S> <C> <C>
Furniture and equipment $ 46,668 $ 54,443
Computer equipment 124,600 181,348
--------- ---------
171,268 235,791
Less accumulated depreciation (20,899) (54,221)
--------- ---------
$ 150,369 $ 181,570
--------- ---------
--------- ---------
</TABLE>
NOTE 3 - LINE-OF-CREDIT
The Company has available a $75,000 line-of-credit with interest at 2.9% over
prime (totaling 10.65% at June 30, 1999). The line has no stated maturity and is
personally guaranteed by the Company's Stockholder. At December 31, 1998 and
June 30, 1999, $69,936 and $63,055 respectively, was borrowed against the line.
F-35
<PAGE>
(Information with respect to June 30, 1998 and 1999 is Unaudited)
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - CAPITAL LEASE OBLIGATIONS
The Company leases computer equipment and office furniture under capital
leases with monthly payments ranging from $253 to $1,880 and interest rates
ranging from 9.4% to 21.5%. The future minimum rental payments due under
capital leases are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999 (six months remaining) $ 35,970
2000 70,791
2001 62,048
2002 16,418
2003 2,804
--------
Total minimum lease payments 188,031
Less amount representing interest (50,847)
--------
Net minimum lease payments 137,184
Less current portion 43,940
--------
$ 93,244
========
</TABLE>
NOTE 5 - FINANCING AGREEMENT
During 1999, the Company entered into an agreement to transfer certain of its
accounts receivable with recourse to a finance company. Inventory, equipment,
accounts receivables and intangible assets collateralized the agreement. The
finance company advances 80% of the account receivable upon submission and
remits the remaining 20% less interest and fees when the account is paid by
the customer. Proceeds from the finance company, during the six months ended
June 30, 1999 were approximately $607,581. Fees and interest paid for the six
months ended June 30, 1999 were approximately $14,309. In addition, the
Company is at risk for credit losses associated with sold receivables and
provides for such in the Company's financial statements. The receivables and
related note payable are reflected in the Company's balance sheet.
NOTE 6 - INCOME TAXES
Upon consummation of an agreement with Telecom Wireless Corporation
("Telecom") to sell the outstanding stockholders' interest of the Company,
the Company's tax status as an S corporation will terminate and, accordingly,
the Company will be subject to federal and state corporate income taxes. The
Company has no significant differences between the book and tax basis of its
assets or liabilities and therefore no deferred tax asset of liability exists
at the date of consummation.
F-36
<PAGE>
(Information with respect to June 30, 1998 and 1999 is Unaudited)
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - COMMITMENTS
OPERATING LEASES
The Company leases office space and computer equipment under noncancelable
operating leases which expire in 2002. Operating expenses and taxes are paid
by the Company. During the six months ended June 30, 1999, the Company
subleased some of their office space. The rental expense for these leases was
$13,144 and $81,210 for the years ended December 31, 1997 and 1998,
respectively and $34,153 and $26,974 for the six months ended June 30, 1998
and 1999, respectively.
Future minimum lease payments as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999 (six months remaining) $ 119,893
2000 380,167
2001 384,089
2002 389,949
2003 389,949
Thereafter 97,487
----------
$1,761,534
==========
</TABLE>
EMPLOYEE LEASING
The Company leases its employees from a third party. In the event an
individual ceases to be engaged by the Company, the Company could be
obligated to pay 60 days service fees, not including employee salaries, to
the leasing company.
NOTE 8 - MAJOR CUSTOMERS AND VENDORS
The Company has a certain customer that accounted for 96% and 81% of the
Company's total revenue for the year ended December 31, 1997 and 1998,
respectively. The same customer accounted for 90% and 30% of the Company's
total revenue for the six months ended June 30, 1998 and 1999, respectively.
A second customer, based in Europe, accounted for 26% of revenue for the six
months ended June 30, 1999.
F-37
<PAGE>
(Information with respect to June 30, 1998 and 1999 is Unaudited)
SYS-GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - SUBSEQUENT EVENTS
In August 24, 1999, the Company merged with Prentice Technologies, Inc. (a
Delaware Corporation) which was a company with common ownership and no assets
or liabilities as of the date of the merger. Effective September 30, 1999,
90% of Prentice Technologies, Inc. was acquired by Telecom Wireless
Corporation.
F-38
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
America's Web Station, Inc.
Naples, Florida
We have audited the accompanying balance sheets of America's Web
Station, Inc. (an S corporation) as of December 31, 1998 and 1997, and the
related statements of operations, changes in stockholders' equity (deficit)
and cash flows for the year ended December 31, 1998 and for the period from
January 29, 1997 (inception) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of America's Web
Station, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the year and period then ended 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 7 to
the financial statements the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 7. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
GIRARDIN BALDWIN & ASSOCIATES LLP
Certified Public Accountants
Naples, Florida
July 30, 1999
F-39
<PAGE>
AMERICA'S WEB STATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1997 1999
----------- ------------ ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32,330 $ 942 $ 5,878
Accounts receivable - trade 10,476 11,877 14,893
--------- --------- ---------
Total current assets 42,806 12,819 20,771
--------- --------- ---------
FURNITURE AND EQUIPMENT, at cost 90,066 58,044 90,214
Less accumulated depreciation 27,459 8,259 36,509
--------- --------- ---------
62,607 49,785 53,705
--------- --------- ---------
OTHER ASSETS
Goodwill, net of accumulated amortization
1999 - $1,127; 1998 - $797; 1997 - $139 9,073 9,731 8,743
Other 3,326 347 2,957
--------- --------- ---------
12,399 10,078 11,700
--------- --------- ---------
$ 117,812 $ 72,682 $ 86,176
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term debt $ 22,310 $ 3,945 $ 22,549
Demand notes payable-stockholders 66,360 7,432 77,460
Accounts payable and accrued expenses 6,986 3,437 10,933
--------- --------- ---------
Total current liabilities 95,656 14,814 110,942
LONG-TERM DEBT, less current maturities 92,157 15,997 80,872
--------- --------- ---------
Total liabilities 187,813 30,811 191,814
--------- --------- ---------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.05 per share; 1,500 shares
authorized, 1,200 shares issued and outstanding 60 60 60
Additional paid in capital 186,065 121,940 186,065
Accumulated (deficit) (256,126) (80,129) (291,763)
--------- --------- ---------
(70,001) 41,871 (105,638)
--------- --------- ---------
$ 117,812 $ 72,682 $ 86,176
========= ========= =========
</TABLE>
See accompanying notes and auditor's report.
F-40
<PAGE>
AMERICA'S WEB STATION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 19, 1997
(Inception)
Year Ended through Six Months Ended June 30,
December 31, December 31, --------------------------
1998 1997 1999 1998
----------- ----------- --------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 170,736 $ 47,405 $ 76,708 $ 88,276
--------- --------- --------- ---------
Costs and expenses
Internet service operating costs 60,805 24,024 24,842 28,557
General and administrative 283,415 102,207 82,415 133,646
--------- --------- --------- ---------
344,220 126,231 107,257 162,203
--------- --------- --------- ---------
(Loss) from operations (173,484) (78,826) (30,549) (73,927)
Interest expense 2,513 1,303 5,088 136
--------- --------- --------- ---------
Net (loss) $(175,997) $ (80,129) $ (35,637) $ (74,063)
========= ========= ========= =========
Earnings (loss) per share, basic and diluted $ (146.66) $ (311.79) $ (29.70) $ (61.72)
========= ========= ========= =========
Weighted average shares outstanding 1,200 257 1,200 1,200
========= ========= ========= =========
</TABLE>
See accompanying notes and auditor's report.
F-41
<PAGE>
AMERICA'S WEB STATION, INC.
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Accumulated
Shares Amount Capital (Deficit) Total
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 29, 1997 -
(Inception) - $ - $ - $ - $ -
Capital contributions 1,200 60 121,940 - 122,000
Net (loss) - - - (80,129) (80,129)
------- --------- --------- -------- --------
Balance, December 31, 1997 1,200 60 121,940 (80,129) 41,871
Capital contributions - - 64,125 - 64,125
Net (loss) - - - (175,997) (175,997)
------- --------- --------- -------- --------
Balance, December 31, 1998 1,200 60 186,065 (256,126) (70,001)
Net (loss) (unaudited) - - - (35,637) (35,637)
------- --------- --------- -------- --------
Balance, June 30, 1999 (unaudited) 1,200 $ 60 $ 186,065 $(291,763) $(105,638)
======= ========= ========= ======== ========
</TABLE>
See accompanying notes and auditor's report.
F-42
<PAGE>
AMERICA'S WEB STATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 29, 1997
(Inception)
Year Ended through Six Months Ended June 30,
December 31, December 31, ---------------------------
1998 1997 1999 1998
----------- ------------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(175,997) $ (80,129) $ (35,637) $ (74,065)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization 19,858 8,398 9,380 9,600
(Increase) decrease in assets:
Accounts receivable 1,401 (11,877) (4,417) (1,454)
Other (2,979) (347) 369 (300)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 3,549 3,437 3,947 (547)
--------- --------- --------- --------
Net cash used by operating activities (154,168) (80,518) (26,358) (66,766)
--------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (32,022) (58,044) (148) (23,543)
Payment of goodwill - (9,870) - -
--------- --------- --------- --------
Net cash used by investing activities (32,022) (67,914) (148) (23,543)
--------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stockholder loans 58,928 7,432 14,700 104,450
Proceeds from borrowings 100,000 22,368 - -
Principal payments on debt (5,475) (2,426) (14,646) (325)
Proceeds from capital contributions 64,125 122,000 - -
--------- --------- --------- --------
Net cash provided by financing activities 217,578 149,374 54 104,125
--------- --------- --------- --------
Net change in cash and cash equivalents 31,388 942 (26,452) 13,816
Cash and cash equivalents:
Beginning 942 - 32,330 942
--------- --------- --------- --------
Ending $ 32,330 $ 942 $ 5,878 $ 14,758
========= ========= ========= ========
Supplemental disclosure of cash flow information:
Cash payments for interest $ 2,513 $ 1,303 $ 4,903 $ 138
========= ========= ========= ========
</TABLE>
See accompanying notes and auditor's report.
F-43
<PAGE>
AMERICA'S WEB STATION, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1999 AND 1998 IS UNAUDITED)
Note 1. Organization and Summary of Significant Accounting Policies
Organization
America's Web Station, Inc. (the Company) formerly known as
Millennium Market Tech, Inc. (Note 4), commenced operations in
January 1997 for the purpose of providing regional internet services
throughout Southwest Florida.
Revenue Recognition
The Company recognizes revenue as services are rendered.
Interim Financial Statements (Unaudited)
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the financial
position of the Company at June 30, 1999 and the results of its
operations and changes in cash flows for the six months ended June
30, 1999 and 1998. The results of operations for the six months
ended June 30, 1999 and 1998 are not necessarily indicative of the
results to be expected for a full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers money
market accounts to be cash equivalents.
See auditor's report.
F-44
<PAGE>
AMERICA'S WEB STATION, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to June 30, 1999
and 1998 is Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies - Continued
Furniture and Equipment
Depreciation of furniture and equipment is computed under
accelerated methods over the estimated useful lives of the assets.
Depreciation expense for the six months ended June 30, 1999 and 1998
was $9,050 and $9,600, respectively, and totaled $19,200 and $8,259
for the year and period ended December 31, 1998 and 1997,
respectively.
The cost of assets retired or sold, together with the related
accumulated depreciation, is removed from the accounts and any
profit or loss on disposition is credited or charged to earnings.
Goodwill
Goodwill is recorded as the differences between net assets acquired
and the related purchase price. Amortization is calculated over an
estimated useful life of fifteen years.
Advertising Costs
All advertising costs are expensed as incurred. Total advertising
costs for the years ended December 31, 1998 and 1997 were $11,548
and $18,269, respectively and totaled $3,051 and $6,002 for the six
month periods ended June 30, 1999 and 1998, respectively.
Income Taxes
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code to be taxed as an S corporation. In lieu of
corporate income taxes, the proportionate share of the Company's
taxable income or loss is recognized by the stockholders.
Accordingly, no provision for income taxes is included in the
accompanying financial statements.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed based upon the
weighted average number of common shares outstanding during the
period. Diluted earnings per share consists of the weighted average
number of common shares outstanding plus the dilutive effects of
options and warrants calculated using the treasury stock method. In
loss periods, dilutive common equivalent shares are excluded as the
effect would be anti-dilutive.
See auditor's report.
F-45
<PAGE>
AMERICA'S WEB STATION, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to June 30, 1999
and 1998 is Unaudited)
Note 2. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1998 1997 1999
-------- -------- --------
<S> <C> <C> <C>
Note payable to financial institution, monthly payments of $1,500 plus interest
at 9.75%, collateralized by all equipment and personally guaranteed by the
stockholders, final balloon payment due November 2003 $ 98,500 $ - $ 89,500
Note payable to financial institution, monthly payments of $463, including
interest at 8.9%, collateralized by vehicle, final payment
due April 2002 15,967 19,942 13,921
-------- -------- --------
114,467 19,942 103,421
Less current maturities 22,310 3,945 22,549
-------- -------- --------
$ 92,157 $ 15,997 $ 80,872
-------- -------- --------
-------- -------- --------
</TABLE>
Long-term debt matures as follows as of June 30, 1999:
<TABLE>
<CAPTION>
Twelve Months Ending June 30,
------------------------------
<S> <C>
2000 $ 22,549
2001 22,923
2002 22,449
2003 18,000
2004 17,500
--------
$103,421
--------
--------
</TABLE>
Note 3. Related Party Transactions
Notes payable to stockholders are unsecured, payable on demand, and
bear interest at 7% to 19%.
See auditor's report.
F-46
<PAGE>
AMERICA'S WEB STATION, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to June 30, 1999
and 1998 is Unaudited)
Note 4. Business Combinations
The Company commenced operations January 1997, as Millennium Market
Tech, Inc. In October 1997, America's Web Station, Inc. was formed
for the primary purpose of changing the name of the business.
Effective January 1998, the Company began operating under the
corporate name America's Web Station, Inc.
The outstanding shares of common stock of Millennium Market Tech,
Inc., which totaled 1,000 shares, were exchanged and canceled in
consideration for the issuance of 1,000 shares of America's Web
Station, Inc. common stock. The combination was accounted for as a
pooling of interests and neither entity recognized a gain or loss.
America's Web Station, Inc. was dormant until the merger occurred.
The Company acquired the assets of Wow Factor in October 1997 for
$12,470, which was accounted for using the purchase method. The
Company's results of operations include the Wow Factor effective
October 15, 1997.
Note 5. Lease Commitment
The Company leases office space and equipment under non-cancelable
operating leases expiring through November 2000. Future minimum
lease payments under the leases as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Twelve Months Ending June 30,
-----------------------------
<S> <C>
2000 $28,214
2001 6,809
-------
$35,023
-------
-------
</TABLE>
Rent expense for the six months ended June 30, 1999 and 1998 was
$18,408 and $12,610, respectively and rent expense for the year and
period ended December 31, 1998 and 1997 was $41,634 and $16,019,
respectively.
See auditor's report.
F-47
<PAGE>
AMERICA'S WEB STATION, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to June 30, 1999
and 1998 is Unaudited)
Note 6. Subsequent Event
In July 1999, the Company's stockholders entered into an agreement
to exchange all outstanding shares of the Company for shares in
Telecom Wireless Corporation (TWC). Under the agreement, TWC will
assume or pay approximately $150,000 of the Company's indebtedness.
Such indebtedness includes the note payable to a financial
institution and accounts payable as of the closing date. Any
remaining amount of the $150,000 is to be applied towards the
Company's notes payable to stockholders. Any residual balance then
remaining for notes payable to stockholders will be converted to
additional paid in capital.
Note 7. Uncertainty
The Company incurred cumulative net losses through June 30, 1999
totaling $291,763 and its liabilities are substantially in excess of
its assets.
As discussed in Note 6, the stockholders have entered into an
agreement whereby $150,000 of Company liabilities are to be assumed
or repaid. In addition, TWC has committed to certain equipment
additions and upgrades resulting in increased capacity for customer
services. The Company will also benefit from administrative,
technical and marketing support from TWC.
The Company's continued existence is dependent upon obtaining
additional financing or capital, increasing revenues and/or reducing
expenses. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
See auditor's report.
F-48
<PAGE>
UNAUDITED PRO FORMA
STATEMENTS OF OPERATIONS
AND CASH FLOWS
The unaudited pro forma statements of operations and cash flows for the year
ended June 30, 1999 and the three months ended September 30, 1999 give effect
to the business combination of Telecom Wireless Corporation, Sys-Group, Inc
d/b/a Prentice Technologies, Inc., and America's Web Station, Inc., as if it
occurred effective July 1, 1998 and July 1, 1999, respectively.
These financial statements include the related pro forma adjustments described
in the notes thereto. The transactions between Telecom Wireless Corporation and
the Companies have been accounted for under the purchase method of accounting.
These pro forma statements are not necessarily indicative of the results of
operations or cash flows as they may be in the future or as they
might have been had the transaction become effective on the above mentioned
dates.
The unaudited pro forma statements of operations and cash flows should be
read in conjunction with the historical financial statements and notes
thereto of Telecom Wireless Corporation.
F-49
<PAGE>
TELECOM WIRELESS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Sys-Group,
Inc. d/b/a
Telecom America's Prentice
Wireless Web Technologies,
Corp. Station, Inc. Inc. Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Internet services $ - $ 159,168 $ - $ 159,168
Wireless cable revenues 522,654 - - 522,654
Consulting fees - - 1,983,064 1,983,064
----------- ----------- ----------- -----------
522,654 159,168 1,983,064 2,664,886
----------- ----------- ----------- -----------
Expenses
Direct expenses 275,705 - 1,276,791 1,552,496
Internet service operating costs - 57,090 - 57,090
Stock based compensation 1,547,560 - - 1,547,560
Selling, general and administrative 2,144,299 232,182 658,642 3,035,123(3)
----------- ----------- ----------- -----------
Total cost of sales and expenses 3,967,564 289,272 1,935,433 6,192,269
----------- ----------- ----------- -----------
Income (loss) from operations (3,444,910) (130,104) 47,631 (3,527,383)
Other income (expenses)
Interest income - - 63,852 63,852
Interest expense (92,341) (7,465) (22,490) (122,296)(5)
----------- ----------- ----------- -----------
Total other income (expense) (92,341) (7,465) 41,362 (58,444)
----------- ----------- ----------- -----------
Income (loss) before income taxes and minority interest (3,537,251) (137,569) 88,993 (3,585,827)
Income tax expense (benefit) - - - -
----------- ----------- ----------- -----------
Income (loss) before minority interest (3,537,251) (137,569) 88,993 (3,585,827)
Minority interest - - - - (4)
----------- ----------- ----------- -----------
Net income (loss) (3,537,251) (137,569) 88,993 (3,585,827)
Dividends on preferred stock - - - -
----------- ----------- ----------- -----------
Net income (loss) available to common stockholders $(3,537,251) $ (137,569) $ 88,993 $(3,585,827)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common share - basic and diluted $ (.94)
-----------
-----------
Weighted average shares outstanding - basic and diluted 3,759,050
-----------
-----------
<CAPTION>
Pro Forma Adjustments Pro Forma
---------------------- Consolidated
Debit Credit Total
----------- ------ -----------
<S> <C> <C> <C>
Revenues
Internet services $ - $ - $ 159,168
Wireless cable revenues - - 522,654
Consulting fees - - 1,983,064
----------- ------ -----------
- - 2,664,886
----------- ------ -----------
Expenses
Direct expenses - - 1,552,496
Internet service operating costs 57,090 57,090
Stock based compensation - - 1,547,560
Selling, general and administrative 624,284 - 3,659,407
----------- ------ -----------
Total cost of sales and expenses 624,284 - 6,816,553
----------- ------ -----------
Income (loss) from operations (624,284) - (4,151,667)
Other income (expenses)
Interest income - 63,852
Interest expense (8,458) - (130,754)
----------- ------ -----------
Total other income (expense) (8,458) - (66,902)
----------- ------ -----------
Income (loss) before income taxes and minority interest (632,742) - (4,218,569)
Income tax expense (benefit) - - -
----------- ------ -----------
Income (loss) before minority interest (632,742) (4,218,569)
Minority interest (8,899) - (8,899)
----------- ------ -----------
Net income (loss) (641,641) (4,227,468)
Dividends on preferred stock - - -
----------- ------ -----------
Net income (loss) available to common stockholders $ (641,641) $ - $(4,227,468)
----------- ------ -----------
----------- ------ -----------
Earnings (loss) per common share - basic and diluted $ (1.02)
-----------
-----------
Weighted average shares outstanding - basic and diluted 4,134,279
-----------
-----------
</TABLE>
F-50
<PAGE>
TELECOM WIRELESS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Sys-Group,
Inc. d/b/a
Telecom America's Prentice
Wireless Web Technologies,
Corp. Station, Inc. Inc. Total
------------ -------------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues
Internet services $ 28,535 $ - $ - $ 28,535
Wireless cable revenues 138,390 - - 138,390
Consulting fees - - 711,432 711,432
Other 4,075 - - 4,075
------------ -------------- ------------- ---------
171,000 - 711,432 882,432
------------ -------------- ------------- ---------
Expenses
Direct expenses 106,342 - 366,524 472,866
Internet service operating costs 27,823 - - 27,823
Stock based compensation 427,699 - - 427,699
Research and development - - 26,024 26,024
Selling, general and administrative 2,406,348 - 351,895 2,406,348(3)
------------ -------------- ------------- ---------
Total cost of sales and expenses 2,968,212 - 744,443 3,712,655
------------ -------------- ------------- ---------
Income (loss) from operations (2,797,212) - (33,011) (2,830,223)
Other income (expenses)
Interest and other income - - 40,135 40,135
Interest expense (64,506) - (10,364) (74,870)(5)
Other expense (24,439) - - (24,439)
------------ -------------- ------------- ---------
Total other income (expense) (88,945) - 29,771 (59,174)
------------ -------------- ------------- ----------
Income (loss) before income taxes and minority interest (2,886,157) - (3,240) (2,889,397)
Income tax expense (benefit) - - - -
------------ -------------- ------------- ---------
Income (loss) before minority interest (2,886,157) - (3,240) (2,889,397)
Minority interest - - - -
------------ -------------- ------------- ---------
Net income (loss) (2,886,157) - (3,240) (2,889,397)
Dividends on preferred stock - - - -
------------ -------------- ------------- ---------
Net income (loss) available to common stockholders $ (2,886,157) $ (3,240) $ (2,889,397)
------------ ------------- ---------
Earnings (loss) per common share - basic and diluted $ (.19)
------------
Weighted average shares outstanding - basic and diluted 15,256,675
------------
------------
<CAPTION>
Pro Forma Adjustments Pro Forma
----------------------- Consolidated
Debit Credit Total
------------ ------ ------------
<S> <C> <C> <C>
Revenues
Internet services $ - $ - $ 28,535
Wireless cable revenues - - 138,390
Consulting fees - - 711,432
Other - - 4,075
------------ ---- ------------
- - 882,432
------------ ---- ------------
Expenses
Direct expenses - - 472,866
Internet service operating costs - - 27,823
Stock based compensation - - 427,699
Research and development 26,024
Selling, general and administrative 156,071 - 2,914,314
------------ ---- ------------
Total cost of sales and expenses 156,071 - 3,868,726
------------ ---- ------------
Income (loss) from operations (156,071) (2,986,294)
Other income (expenses)
Interest and other income - - 40,135
Interest expense (5,075) - (79,945)
Other expense - - (24,439)
------------ ---- ------------
Total other income (expense) (5,075) - (64,249)
------------ ---- ------------
Income (loss) before income taxes and minority interest (161,146) (3,050,543)
Income tax expense (benefit) - - -
------------ ---- ------------
Income (loss) before minority interest (161,146) (3,050,543)
Minority interest 324 - 324
------------ ---- ------------
Net income (loss) (160,822) - (3,050,219)
Dividends on preferred stock - - -
------------ ---- ------------
Net income (loss) available to common stockholders $ (160,822) $ - $ (3,050,219)
------------ ---- ------------
Earnings (loss) per common share - basic and diluted $ (.20)
------------
Weighted average shares outstanding - basic and diluted 15,609,011
------------
------------
</TABLE>
F-51
<PAGE>
TELECOM WIRELESS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
Sys-Group,
Inc. d/b/a
Telecom America's Prentice Pro Forma Pro Forma
Wireless Web Technologies, Acquisition Consolidated
Corp. Station, Inc. Inc. Total Adjustments Total
----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $(3,537,251) $ (137,569) $ 88,993 $(3,585,827) $ (616,834) $(4,202,661)
----------- ------------ ------------ ----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash used by operating activities
Depreciation and amortization 348,708 19,638 46,800 415,146 599,477 1,014,623
Stock issued for services 30,000 - - 30,000 - 30,000
Imputed value of options granted for services 1,547,560 - - 1,547,560 - 1,547,560
Accretion on preferred stock 91,227 - - 91,227 - 91,227
Changes in assets and liabilities
Accounts receivable 12,245 (1,562) (312,372) (301,689) - (301,689)
Other assets (3,880) (2,310) - (6,190) - (6,190)
Accounts payable (14,510) 8,043 1,005 (5,462) - (5,462)
Accrued expenses 104,445 - - 104,445 - 104,445
Other liabilities - - 131,913 131,913 - 131,913
----------- ------------ ------------ ----------- ----------- -----------
2,115,795 23,809 (132,654) 2,006,950 599,477 2,606,427
----------- ------------ ------------ ----------- ----------- -----------
Net cash used by operating activities (1,421,456) (113,760) (43,661) (1,578,877) (17,357) (1,596,234)
----------- ------------ ------------ ----------- ----------- -----------
Cash flows from investing activities
Acquisition of equipment (121,117) (8,627) (52,399) (182,143) - (182,143)
Net change in other assets - - (45,937) (45,937) - (45,937)
----------- ------------ ------------ ----------- ----------- -----------
Net cash used by investing activities (121,117) (8,627) (98,336) (228,080) - (228,080)
----------- ------------ ------------ ----------- ----------- -----------
Cash flows from financing activities
Net activity on line-of-credit/floor plans - - 281,979 281,979 - 281,979
Net repayments to related party (16,666) (30,822) - (47,488) - (47,488)
Sale of common stock/capital contribution 2,179,305 64,125 - 2,243,430 - 2,243,430
Net payments on notes payable - (19,796) - (19,796) - (19,796)
Net proceeds from notes payable - 100,000 - 100,000 - 100,000
Net payments on capital leases - - (30,901) (30,901) - (30,901)
Dividends/distributions paid - - (57,753) (57,753) - (57,753)
----------- ------------ ------------ ----------- ----------- -----------
Net cash provided by financing activities 2,162,639 113,507 193,325 2,469,471 - 2,469,471
----------- ------------ ------------ ----------- ----------- -----------
Net increase (decrease) in cash 620,066 (8,880) 51,328 662,514 (17,357) 645,157
Cash at beginning of period 600 14,758 52,828 68,186 - 68,186
----------- ------------ ------------ ----------- ----------- -----------
Cash at end of period $ 620,666 $ 5,878 $ 104,156 $ 730,700 $ (17,357) $ 713,343
----------- ------------ ------------ ----------- ----------- -----------
----------- ------------ ------------ ----------- ----------- -----------
</TABLE>
F-52
<PAGE>
TELECOM WIRELESS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
Sys-Group,
Inc. d/b/a
Telecom America's Prentice
Wireless Web Technologies,
Corp. Station, Inc. Inc.
---------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,886,157) $ - $ (3,240)
----------- ------------- -------------
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 117,347 - 20,774
Deferred rent expense - - 38,808
Provision for doubtful accounts - - -
Stock issued for services 427,699 - -
Warrants issued 62,294 - -
Accretion on preferred stock 24,439 - -
Loss on asset disposals - - -
Deferred tax expense - - -
Minority interest in subsidiary - - -
Changes in assets and liabilities
Accounts receivable (55,074) - (164,682)
Prepaid expenses - - (3,000)
Other assets 1,049 - -
Accounts payable 1,072,336 - 13,820
Deferred revenue - - -
Accrued expenses (103,699) - (7,500)
Other liabilities - - 7,457
----------- ------------- -------------
1,546,391 - (94,323)
----------- ------------- -------------
Net cash used by operating activities (1,339,766) - (97,563)
----------- ------------- -------------
Cash flows from investing activities
Acquisition of equipment (164,726) - -
Cash acquired from acquisitions 85,659 - -
Acquisition costs (554,884) - -
Net change in other assets - - (1,547)
----------- ------------- -------------
Net cash used by investing activities (633,951) - (1,547)
----------- ------------- -------------
Cash flows from financing activities
Net activity on line-of-credit/floor plans - - 89,786
Net advances from (repayments to) related party (105,163) - -
Sale of common stock/capital contribution 1,381,905 - -
Net payments on notes payable (127,062) - -
Net proceeds from notes payable 1,000,000 - -
Net payments on capital leases - - (15,051)
Offering costs (100,850) - -
Dividends/distributions paid - - -
----------- ------------- -------------
Net cash provided by financing activities 2,048,830 - 74,735
----------- ------------- -------------
Net increase (decrease) in cash 75,113 - (24,375)
Cash at beginning of period 620,666 - 104,156
----------- ------------- -------------
Cash at end of period $ 695,779 $ - $ 79,781
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
<TABLE>
Pro Forma Pro Forma
Acquisition Consolidated
Total Adjustments Total
----------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(2,889,397) $ (160,822) $(3,050,219)
----------- ------------- -------------
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 138,121 156,071 294,192
Deferred rent expense 38,808 - 38,808
Provision for doubtful accounts - - -
Stock issued for services 427,699 - 233,750
Warrants issued 62,294 - 62,294
Accretion on preferred stock 24,439 - 24,439
Loss on asset disposals - - -
Deferred tax expense - - -
Minority interest in subsidiary - 324 324
Changes in assets and liabilities
Accounts receivable (219,756) - (219,756)
Prepaid expenses (3,000) - (3,000)
Other assets 1,049 - 1,049
Accounts payable 1,086,156 - 1,086,156
Deferred revenue - - -
Accrued expenses (111,199) - (111,199)
Other liabilities 7,457 - 7,457
----------- ------------- -------------
1,452,068 156,395 1,608,463
----------- ------------- -------------
Net cash used by operating activities (1,437,329) (4,427) (1,441,756)
----------- ------------- -------------
Cash flows from investing activities
Acquisition of equipment (164,726) - (164,726)
Cash acquired from acquisitions 85,659 - 85,659
Acquisition costs (554,884) - (554,884)
Net change in other assets (1,547) - (1,547)
----------- ------------- -------------
Net cash used by investing activities (635,498) - (635,498)
----------- ------------- -------------
Cash flows from financing activities
Net activity on line-of-credit/floor plans 89,786 - 89,786
Net advances from (repayments to) related party (105,163) - (105,163)
Sale of common stock/capital contribution 1,381,905 - 1,381,905
Net payments on notes payable (127,062) - (127,062)
Net proceeds from notes payable 1,000,000 - 1,000,000
Net payments on capital leases (15,051) - (15,051)
Offering costs (100,850) - (100,850)
Dividends/distributions paid - - -
----------- ------------- -------------
Net cash provided by financing activities 2,123,565 - 2,123,565
----------- ------------- -------------
Net increase (decrease) in cash 50,738 (4,427) 46,311
Cash at beginning of period 724,822 - 724,822
----------- ------------- -------------
Cash at end of period $ 775,560 $ (4,427) $ 771,133
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-53
<PAGE>
In July 1999 the Company consummated an acquisition of all of the issued and
outstanding common shares of America's Web Station for 28,562 shares of common
stock valued at $199,931 for purposes of the acquisition. The acquisition has
been accounted for as a purchase. The purchase price, including acquisition
costs, was allocated as follows:
<TABLE>
<S> <C>
Cash $ 5,878
Accounts receivable, net 14,893
Property and equipment, net 53,705
Intangible assets 8,743
Subscriber lists 225,000
Other assets 2,957
-----------
311,176
Liabilities assumed (191,814)
-----------
119,362
Consideration given and acquisition costs (225,390)
-----------
Excess purchase price recorded as goodwill $ 136,028
-----------
-----------
</TABLE>
Effective September 30, 1999, the Company consummated the acquisition of 90% of
the issued and outstanding common stock of Prentice Technologies, Inc. for
346,667 shares of common stock valued at $2,680,419 for purposes of the
acquisition and issued at $253,750 note payable. The note is payable in six
monthly installments of $43,284 including interest at 8% per annum. Payments
were to begin October 23, 1999, however, no payments have been made. The
acquisition has been accounted for as a purchase. The purchase price, including
acquisition costs, was allocated as follows:
<TABLE>
<S> <C>
Cash $ 104,156
Accounts receivable, net 416,604
Property and equipment, net 181,570
Other assets 54,648
-----------
756,978
Liabilities assumed (618,377)
Minority Interest (16,061)
-----------
122,540
Consideration given and acquisition costs (2,754,942)
-----------
Excess purchase price recorded as goodwill $ 2,610,390
-----------
-----------
</TABLE>
(1) To record amortization of goodwill and subscriber lists.
(2) To record 10% minority interest in earnings of Prentice.
(3) To record interest expenses on note issued in conjunction with
acquisition of Prentice.
F-54
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
3.1* Articles of Incorporation of Telecom Wireless as filed with the
Utah Secretary of State on April 12, 1984
3.2* Articles of Amendment to Articles of Incorporation as filed with
the Utah Secretary of State on March 12, 1998
3.3* Articles of Amendment to Articles of Incorporation as filed with
the Utah Secretary of State on April 20, 1998
3.4* Articles of Amendment to Articles of Incorporation setting forth
the Preferences, Limitations, and Relative Rights of Redeemable,
Non-voting, Cumulative Preferred Stock, Series 1998-1 as filed
with the Utah Secretary of State on November 9, 1999
3.5* Bylaws of Telecom Wireless
10.1* Stock Purchase Option dated June 1, 1998, between Telecom Wireless
and Marc L. Baker Consulting, Inc., as amended and assigned to
Joshua Mailman
10.2* Stock Purchase Option dated June 18, 1998 between Telecom Wireless
and Herman L. Walker
10.3* Office Lease Agreement dated January 20, 1999 between Prentice
Point Limited Partnership and The Enterprise Systems Group, Inc.
10.4* Corporate Finance/Placement Agent Agreement dated March 26, 1999
between Telecom Wireless and Jack Augsback & Associates, Inc.
10.5* Executive Employment Agreement made and effective as of March 29,
1999 between Phoenix Communications, Inc. (predecessor to Telecom
Wireless) and each of its executive officers accompanied by a
schedule identifying such Agreements to which Telecom Wireless is
a party that are substantially identical and material details in
which such agreements differ from filed agreement
10.6* Common Stock Purchase Agreement dated April 6, 1999 between
Telecom Wireless and those persons identified on accompanying
schedule
10.7* Nonqualified Stock Option Agreement dated April 13, 1999 between
Telecom Wireless and James C. Roberts accompanied by a schedule
identifying other Nonqualified Stock Option Agreements to which
Telecom Wireless is a party that are substantially identical and
material details in which such agreements differ from filed
agreement
10.8* Nonqualified Stock Option Agreement dated May 4, 1999, issued to
Jay W. Enyart for the purchase of 400,000 shares of common stock
10.9* Nonqualified Stock Option Agreement dated May 4, 1999, issued to
Jay W. Enyart for the purchase of 261,192 shares of common stock
10.10* Placement Agent Agreement dated May 25, 1999 between Telecom
Wireless and Jack Augsback & Associates, Inc.
61
<PAGE>
10.11* Common Stock Purchase Agreement dated May 25, 1999 between Telecom
Wireless and those persons identified on accompanying schedule
10.12* Registration Rights Agreement between Telecom Wireless and the
persons listed on the purchaser signature pages thereto
accompanied by a schedule identifying other Registration Rights
Agreements to which Telecom Wireless is a party that are
substantially identical and material details in which such
agreements differ from filed agreement
10.13* Repricing Warrant issued by Telecom Wireless to each of the
persons identified in the accompanying schedule
10.14* Warrant Certificate No. TK-2 dated May 24, 1999 issued by Telecom
Wireless to Thomson Kernaghan & Co., Ltd., as Agent
10.15* Placement Agent Warrant Certificate No. TK-1 dated June 9, 1999
issued by Telecom Wireless to Thomson Kernaghan & Co. Ltd.
10.16* Common Stock Purchase Agreement dated July 28, 1999 between
Telecom Wireless and those persons identified on accompanying
schedule
10.17* Master Lease Agreement dated July 30, 1999 between Lucent
Technologies, Inc. Internetworking Division and Telecom Wireless
10.18* Warrant Agreement dated August 26, 1999 issued by Telecom Wireless
to Jack Augsback & Associates, Inc. accompanied by a schedule
identifying other Warrant Agreements to which Telecom Wireless is
a party that are substantially identical and material details in
which such agreements differ from filed agreement
10.19* Services Agreement dated August 30, 1999 between Telecom Wireless
and John H. Sununu
10.20* Letter Agreement dated September 1, 1999 between Telecom Wireless
and First Equity Capital Securities, Inc., as amended
10.21* Form of Bridge Loan Agreement between Telecom Wireless and Commtel
Services Ltd. accompanied by a schedule identifying other Bridge
Loan Agreements to which Telecom Wireless is a party that are
substantially identical and material details in which such
agreements differ from filed agreement
10.22* Guaranty dated September 1, 1999 by Dr. James C. Roberts for the
benefit of Commtel Services Ltd., Kenneth R. Levine and Stanley
Becker, in their capacity as Bridge Lenders
10.23* Common Stock Purchase Agreement dated as of September 10, 1999
between Telecom Wireless and those persons identified on
accompanying schedule
10.24* Agreement and Plan of Merger dated September 21, 1999 among
Telecom Wireless, TWC/Prentice Acquisition Company, Inc. and
Prentice Technologies, Inc.
10.25* Executive Employment Agreement dated September 23, 1999 between
Telecom Wireless and Shawn P. Richmond
10.26* Warrant dated October 17, 1999 issued by Telecom Wireless to
John H. Sununu for the purchase of 720,000 shares
10.27* Warrant dated October 17, 1999 issued by Telecom Wireless to
John H. Sununu for the purchase of 500,000 shares
10.28* Amended and Restated 1999 Stock Option and Restricted Stock Plan
10.29* Put/Call Agreement dated August 16, 1999 between Telecom Wireless
and Joshua Mailman, as amended
10.30* Form of Warrant to Purchase Shares of Common Stock dated
November 29, 1999 issued to each of Calvin D. Smiley and
Esper Gullatt, Jr. for the purchase of 61,611 shares
21.1* List of Subsidiaries of Telecom Wireless
</TABLE>
- --------------------
* Incorporated by reference to the same numbered exhibit in
Registrant's Registration Statement on Form SB-2 dated
November 29, 1999, SEC File No. 333-91717.
62
<PAGE>
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, thereunto duly authorized.
TELECOM WIRELESS CORPORATION
Date: December 14, 1999 By: /s/ James C. Roberts
---------------------------------------
Name: James C. Roberts
Title: Chairman of the Board of Directors and
Chief Executive Officer
63
