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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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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 1120
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices) (Zip Code)
(303) 416-4000
(Issuer's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is To Be Registered
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None N.A.
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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TABLE OF CONTENTS
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PART I...............................................................................1
ITEM 1. DESCRIPTION OF BUSINESS...............................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............22
ITEM 3. DESCRIPTION OF PROPERTY..............................................33
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...........................................................34
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.........35
ITEM 6. EXECUTIVE COMPENSATION...............................................37
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................41
ITEM 8. DESCRIPTION OF SECURITIES............................................43
PART II.............................................................................44
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.......................................44
ITEM 2. LEGAL PROCEEDINGS....................................................45
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS........................45
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES..............................46
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS............................48
PART F/S............................................................................51
PART III............................................................................52
ITEM 1. INDEX TO EXHIBITS.....................................................52
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Telecom Wireless Corporation is an Internet communications company
which intends to capitalize on the convergence of video, voice and data
communications on the Internet. The company's business plan calls for initial
rapid growth through acquisitions and subsequent organic growth. Telecom
Wireless intends to accomplish its objectives by providing access or
"connectivity" for Internet and other electronic communications, Internet
content and electronic commerce, and other communications services. Its
target markets include both residential and business customers.
Key elements of Telecom Wireless' business plan are:
- acquiring and consolidating geographically disparate ISPs 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 directly or by outsourcing;
- 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;
and
- building customer loyalty and gaining market share through
unified branding.
Most of Telecom Wireless' business plan has yet to be implemented. The
company now owns and operates an ISP, America's Web Station, Inc., and a
wireless cable television system, Keys Microcable Corporation. Over the past few
months, we have conducted accounting and legal due diligence and, in many cases,
extensive contract negotiations, with several ISP and ASP acquisition
candidates, although Telecom Wireless currently has no arrangements, agreements
or understandings with potential acquisition candidates.
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 implementing our business plan. We need capital to sustain
operations and to consummate acquisitions. Management can
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give no assurance that Telecom Wireless' 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 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, information resource and sales and distribution
channel; and
- reliability of service by Internet access providers.
ACCESSING THE INTERNET.
Internet access services are 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
are in the process of merging, 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
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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.
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.
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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.
Management believes the number of businesses and consumers accessing
the Internet will 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.
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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' digital subscriber line and
other equipment used to connect to the leased copper lines;
- 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
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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 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 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 ISPs and CLECs in selected geographic areas throughout
the U.S. 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. At present,
Telecom Wireless does not have any current plans, arrangements, agreements or
understandings with potential acquisition partners.
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, ISPs must respond by offering the
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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 Telecom
Wireless will evaluate each candidate's ability to offer these various services
and a "best in class" will be identified whenever possible. Telecom Wireless
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, which are
sometimes referred to as Baby Bells, through low-cost resale agreements and
value-added bundled service packages. Initially, CLECs operated as basic
telephone service resellers. CLECs have evolved by positioning themselves as
integrated communications providers, offering a full suite of telecommunications
services that includes providing customers with voice, data, Internet and video
services. Integrated communications providers 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.
Telecom Wireless intends to integrate the broadband wireless and copper
pair technology into the CLECs it acquires. The ability to provide a high
bandwidth connection at a significantly lower cost than the Baby Bells 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, Telecom
Wireless 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, Telecom Wireless' 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. Telecom
Wireless 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
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marketing and branding programs established by Telecom Wireless to expand its
customer base and improve its customer retention.
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, Telecom Wireless 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. Telecom Wireless 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 many ISP businesses, which often results in sharply
increased subscriber churn rates after acquisitions, 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 Telecom Wireless 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: Telecom Wireless 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 one location. 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, local area network or local
area network, and routing to the Internet. 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.
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It is not the intent of Telecom Wireless to "re-invent" the wheel when
it comes to establishing these operational elements. While it is possible for
Telecom Wireless to build them internally, Telecom Wireless may seek to acquire
or merge with a national ISP which has many of the elements already in place.
Telecom Wireless may also seek to outsource ISP management to third parties
having excess capacity.
INTEGRATION OF ISPS AND CLECS.
Telecom Wireless' business plan calls for providing high-speed
connectivity and common services across ISPs and to all our subscribers. To
accomplish this goal, we will take a 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 or
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 asynchronous transfer mode or ATM backbone to form a ubiquitous
wide area network to be administered by Telecom Wireless staff at a
central network operations center 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
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necessary components for electronic commerce, such as construction
of relational databases and market baskets.
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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. 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 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, some of the acquired providers may continue to exist as separate,
wholly owned subsidiaries, but operated as part of the local operating region.
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MANAGEMENT OF TELECOM WIRELESS' 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 intend to 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 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 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 Telecom Wireless, generally
retaining their personnel, systems, procedures and
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employee benefits. Depending upon the availability of capital, we will
gradually implement the integration, consolidation and standardization
aspects of our business plan. This means Telecom Wireless 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 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.
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CURRENT OPERATIONS
Telecom Wireless currently conducts operations through two
subsidiaries, Keys Microcable Corporation and America's Web Station.
KEYS MICROCABLE CORPORATION. In June 1998, Telecom Wireless acquired
all the issued and outstanding stock of Keys Microcable Corporation. KMC has
operated a 32-channel wireless cable television system in the lower Florida Keys
and Key West, Florida, since 1994. 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 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.
KMC is 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 protocol
or 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 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. Dial-up Internet access and web site hosting
for businesses subsequently were 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.
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Other than the operations of the Keys Microcable and America's Web
Station subsidiaries, the primary focus of management at present is to raise
necessary capital for both operations and acquisitions. The company's financing
team has had numerous meetings over the past few months with investment bankers
and other potential financing sources. In addition, management has met with
larger ISPs regarding possible management of our acquired ISPs on an outsourcing
basis. Management believes that these efforts will result in financing adequate
to implement our business plan, although we cannot assure whether or when that
will occur.
In addition, Telecom Wireless has entered into two equipment agreements
which will enable it to build the infrastructure required to implement its
business plan, including building a broadband wireless network, when adequate
funding is obtained.
ADAPTIVE BROADBAND CORPORATION. One equipment agreement was entered
into in December 1999 with Adaptive Broadband Corporation. The agreement with
Adaptive Broadband contemplates purchase by Telecom Wireless of broadband
wireless telecommunications equipment and services to establish wireless
communications networks in North America for small- and medium-size businesses
and consumers. Adaptive has represented that its technology offers wireless line
of sight data transmission rates of 25 megabits per second (Mbps) with 100 Mbps
planned for later this year. These transmission rates would provide capacity for
simultaneous real-time video conferencing, transmission of full streaming video,
web surfing and transmission of data files. The wireless point to multi-point
system will enable installation of networks at a lower cost and in a much
shorter period of time as compared to a "wired" network. The system requires
minimal termination equipment at the customer site and generally will utilize
existing building wiring.
Telecom Wireless plans to deploy Adaptive Broadband equipment in both
the licensed multimedia distribution system or MMDS frequency spectrums as well
as the unlicensed national information infrastructure or U-NII. The U-NII
spectrum was set aside by the FCC to facilitate rapid and inexpensive wireless
access to informational resources by educational institutions, business,
industry, and consumers.
The agreement with Adaptive Broadband requires expenditures over its
five-year term of approximately $225 million by Telecom Wireless. We are
obligated to, but have not yet placed, a purchase order in the amount of
$13,635,375 covering equipment to be delivered this year including equipment to
conduct a trial test through Keys Microcable Corporation. Adaptive Broadband
will provide the test plan for the trial and Telecom Wireless and Adaptive
Broadband will jointly conduct the test. Subject to the availability of capital,
we plan to rapidly deploy wireless broadband services in a substantial number of
markets. Initial planning for a five-city rollout is currently under way.
Either party may terminate the agreement if the other party is, among
other things, insolvent, bankrupt or is unable to pay its debts. In addition,
Adaptive Broadband may terminate the agreement if it is not satisfied with the
sales or promotional performance of Telecom Wireless. In the event Adaptive
Broadband should breach the agreement, including infringement
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of its technology on the rights of others, the indemnification obligation of
Adaptive Broadband to Telecom Wireless is limited to the purchase price of
the infringing product. The costs to the company of defending infringement
litigation and securing necessary licenses could substantially exceed that
amount.
LUCENT TECHNOLOGIES LEASE/FINANCING. Telecom Wireless entered into an
equipment agreement styled as 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, Lucent has agreed to provide telecommunications
and other equipment to Telecom Wireless and its subsidiaries having a maximum
aggregate purchase price of $20,000,000. Telecom Wireless may lease equipment
with a value of up to $5,000,000 without having to satisfy certain covenants and
financial ratios. To date, Telecom Wireless has received equipment having a
value of approximately $1.2 million. Most of the equipment presently is in
storage in Albuquerque, New Mexico.
Among other potential uses, Telecom Wireless may use Lucent equipment
to build a high-capacity asynchronous transfer mode or ATM voice and data
network, which will allow Telecom Wireless to provide high quality, high-speed
voice and data network services to corporations, alternative carriers and ISPs.
The revenue generating services that could be offered through such a network
include high-speed ATM and frame relay backbone connections, dedicated and
dial-up Internet access, and virtual private networks which are restricted
access Internet-based networks established by businesses for internal use such
as among employees, vendors and customers.
POTENTIAL BUSINESS PROSPECTS
Telecom Wireless has entered into transactions which may provide
business or investment opportunities in the future. As of the date of this
registration statement, whether these transactions will result in benefit to
Telecom Wireless is unknown.
<PAGE>
INTERNATIONAL DATACASTING CORPORATION. Telecom Wireless has granted
Joshua Mailman the right, exercisable at any time until February 1, 2000, to
cause Telecom Wireless 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. 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 Telecom Wireless' common stock. In addition, Telecom
Wireless 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 Telecom Wireless'
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 under the 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.
HYPERLIGHT NETWORK CORPORATION. Telecom Wireless is investigating a new
technology which involves software and hardware modulation and compression
equipment that appears to be able to transmit data at rates as high as 45 mega
bits per second ("Mbps") over traditional copper pair transmission facilities.
It also appears to be able to support the 45 Mbps
<PAGE>
transmission over a coast-to-coast dial-up telephone call and perhaps over
fiber cable, wireless and coaxial cable. The technology is in the development
stage. Management has been informed that the technology currently is
undergoing testing to determine commercial viability by an independent third
party.
Telecom Wireless entered into agreements to acquire what management
believes is approximately a 4.9% equity interest in Hyperlight Network
Corporation, the entity that purports to own the technology or to have the right
to acquire the technology. The sellers claim we are in default under these
agreements and claim to have terminated two of the agreements. The agreements
purport to obligate Telecom Wireless to pay $1.6 million and deliver 500,000
shares of our common stock for this equity interest. We have delivered the
500,000 shares and have paid $700,000, financed with borrowed funds under a
convertible promissory note due April 30, 2000. Of the remaining $900,000,
sellers claim payment of $300,000 is in default and that $300,000 is due on each
of March 1 and June 1, 2000. In consideration of the agreement of Hyperlight to
renegotiate the agreements in good faith, Telecom Wireless delivered to
Hyperlight an additional 452,381 shares of common stock.
The agreements to be renegotiated include a world-wide, non-exclusive,
five-year license agreement which gave us the right to distribute the technology
and to sublicense the technology to the end users, with the exception of the
United States government. The seller purportedly has terminated the license
agreement due to our default.
Whether the sellers will renegotiate the agreements on terms economic
to Telecom Wireless and whether the sellers will provide adequate information
with respect to the viability and ownership of the technology is unknown. In
addition, we are in discussions with venture capitalists and others to provide
the necessary financing. At present, we have no financing commitments and can
give no assurance that financing can be obtained at all or upon reasonable
terms. For all of these reasons, whether the technology will have any value to
Telecom Wireless is speculative.
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 and CLECs, current and prospective competitors of Telecom Wireless 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;
<PAGE>
- 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
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.
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
TELECOMMUNICATIONS CARRIERS.
All the major long distance companies, which are also known as
interexchange carriers, 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, including the regional bell operating companies, to
enter the ISP market. To address the Internet connectivity requirements of the
current business customers of long distance and local carriers, interexchange
carriers 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
<PAGE>
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 interexchange
carriers and local exchange carriers.
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,
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.
<PAGE>
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 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. As an
Internet access provider, we 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, our ISP business is not subject to federal regulations applicable to
telephone companies and similar carriers merely because we provide our ISP
services using telecommunications services provided by third-party carriers. To
date, no state has attempted to exercise economic regulation over Internet
service providers.
Governmental regulatory approaches and policies for 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.
<PAGE>
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 Internet protocol 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
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 intend to offer, and if
that affiliate interconnects with the incumbent local exchange carrier's network
on the same terms and 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 the operations
of competitive local exchange carriers, such as use of rights-of-way. Although
typically start-up
<PAGE>
telecommunications carriers are not subject to all of the Federal
Communications Commission's 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 providing 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 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.
<PAGE>
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 January 28, 2000, Telecom Wireless and its subsidiaries had 22
full-time employees, including executive officers. Five of these employees were
employed by America's Web Station, Inc. and seven were employed by Keys
Microcable. Telecom Wireless' employees are not covered by any collective
bargaining agreement, and it has never experienced a work stoppage. Management
believes that Telecom Wireless' employee relations are good.
<PAGE>
RISK FACTORS
An investment in the common stock of Telecom Wireless is subject to a
high degree of risk. 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 common stock of Telecom Wireless could decline.
TELECOM WIRELESS HAS EXPERIENCED DIFFICULTY IMPLEMENTING ITS BUSINESS
PLAN
Telecom Wireless has an ambitious business plan that it has been
attempting to implement since April 1999. Since the company has experienced
difficulty obtaining financing from traditional sources, execution of most of
its business plan has been delayed. There can be no assurance that the business
plan can be implemented and successfully executed.
SUBSTANTIAL DOUBT EXISTS AS TO TELECOM WIRELESS' ABILITY TO CONTINUE AS
A GOING CONCERN
The independent auditor's report on the June 30, 1999, financial
statements of Telecom Wireless 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 $3,445,000 and
$2,862,000 for the year ended June 30, 1999 and for the quarter ended September
30, 1999, respectively, and had an accumulated deficit of approximately
$9,828,000 as of September 30, 1999. During the same periods, Telecom Wireless
had negative cash flows from operations of approximately $1,421,000 and
$1,340,000, respectively.
Management projects that Telecom Wireless will continue to incur net
losses and experience negative cash flow for the foreseeable future. This
will require substantial amounts of capital. As of the date of this
registration statement, management does not have commitments for additional
financing and cannot be sure that Telecom Wireless will be able to obtain
<PAGE>
any such commitments at all or upon reasonable terms and conditions.
Management expects Telecom Wireless 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 modify, delay or abandon the business plan. As of
the date of this registration statement, management does not have commitments
for any additional financing and cannot be sure that Telecom Wireless 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
<PAGE>
The success of Telecom Wireless will depend to a great extent 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. Consolidating
acquired businesses and integrating regional operations may take a significant
period of time, will place a significant strain on Telecom Wireless' resources
and could prove to be more expensive than expected. Telecom Wireless may
increase expenditures to accelerate the integration and consolidation of its
acquired operations , but it cannot guarantee this result nor can the company
assure investors that its resources will be sufficient to successfully implement
its expansion program.
TELECOM WIRELESS IS SUBJECT TO ALL RISKS FACED BY START-UP INTERNET
COMPANIES
When making your investment decision, you should consider the risks and
difficulties Telecom Wireless may encounter in building and operating a business
in the rapidly evolving telecommunications sector, especially given its limited
operating history:
- 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.
- The telecommunications services business, including the Internet
services sector, is extremely competitive and is changing
rapidly. Competition could result in loss of customers and
reduction of revenues. Most of our competitors have significantly
greater market presence, brand recognition, and financial,
technical and personnel resources than Telecom Wireless has, and
many have extensive coast-to-coast Internet backbones and large
customer bases.
- We expect increasing competition from Internet service providers
using alternative technologies including:
- telecommunications providers that bundle Internet
access with basic local and long distance
telecommunications services, which could force Telecom
Wireless to price its services at a level that would
have an adverse effect on its 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.
<PAGE>
- Management expects Telecom Wireless to encounter significant
pricing pressure as a result of competition and advances in
technology.
- 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 Telecom Wireless' technology or
that third parties, including competitors, will not independently
develop technologies that are substantially equivalent or
superior to Telecom Wireless' proprietary technology.
MANAGEMENT'S PLANNED AGGRESSIVE GROWTH WILL STRAIN TELECOM WIRELESS'
RESOURCES
Management intends to expand the operations of Telecom Wireless rapidly
through acquisitions by aggressively pursuing 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. This rapid growth will place a
significant strain on our managerial, operational and financial resources.
To manage our growth, management must improve the operational systems,
procedures and controls of Telecom Wireless on a timely basis by centralizing
and standardizing Telecom Wireless' operations and upgrading and replacing
outdated infrastructure. If the demands placed on its network resources by a
growing subscriber base outpace its growth and operating plans, the quality and
reliability of our service may decline and relationships with customers may be
harmed as a result.
IF TELECOM WIRELESS IS UNABLE TO ESTABLISH SATISFACTORY PEERING
RELATIONSHIPS, COSTS MAY INCREASE
Management intends to establish and maintain "peering" relationships
with other ISPs and with CLECs so that Telecom Wireless can exchange traffic
without paying transit costs. If management is unable to establish adequate
peering relationships, our costs will increase and our revenues could decrease.
This would harm the business, financial condition and results of operations of
Telecom Wireless.
TELECOM WIRELESS COULD FACE LOSSES AND POTENTIAL LIABILITY IF
INTRUSIONS, VIRUSES OR SIMILAR DISRUPTIONS TO ITS NETWORK OR COMPUTER
SYSTEMS IMPEDE ITS SERVICE OR JEOPARDIZE ITS CONFIDENTIAL INFORMATION
OR THAT OF ITS SUBSCRIBERS
Although management has implemented, and will continue to implement,
security measures, the computer systems of Telecom Wireless are vulnerable to
computer viruses, break-ins and similar disruptive problems caused by customers
or other users. Any such occurrences could lead to interruptions, delays or
cessation in service to our customers and could jeopardize the security of
confidential information stored in the computer systems of our customers. This
could, in turn, deter potential customers and adversely affect existing customer
relationships.
<PAGE>
The security services that Telecom Wireless offers in connection with
its customers' networks cannot assure complete protection from these problems.
Although management will attempt to limit contractually Telecom Wireless'
liability in these instances, the occurrence of security-related problems may
result in claims against Telecom Wireless 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 business or reputation of Telecom
Wireless 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 our customer base and revenues.
IF SUPPLIERS FAIL TO PROVIDE TELECOM WIRELESS WITH THE EQUIPMENT IT
NEEDS, WE MAY LOSE CUSTOMERS
There are only a limited number of businesses that can supply Telecom
Wireless with the key components it will need for its planned network
infrastructure, including telecommunications services and networking equipment.
Management cannot be certain that suppliers and telecommunications carriers will
continue to sell or lease their products and services to Telecom Wireless at
commercially reasonable prices or at all. If there are delays in receiving this
equipment, Telecom Wireless may not be able to service its customers.
Difficulties in developing alternative sources of supply, if required, could
adversely affect its business, future financial condition or operating results.
Moreover, failure of telecommunications providers to provide the data
communications capacity required by Telecom Wireless for any reason could cause
interruptions in its ability to provide access services to its customers, which
may materially and adversely affect our business, financial condition and
operating results.
<PAGE>
TELECOM WIRELESS MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY
STANDARDS TO REMAIN COMPETITIVE
Telecom Wireless 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. We cannot
assure that we will be able to do so or that any new technologies or
enhancements used by Telecom Wireless or offered to its customers will achieve
market acceptance.
Our ability to compete successfully also depends on the compatibility
and interoperability of our 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
Telecom Wireless will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market.
Telecom Wireless 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, Telecom
Wireless 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 our Internet access services
business to alternative Internet access devices and conduits.
<PAGE>
TELECOM WIRELESS FACES THE UNCERTAINTY OF SUBSCRIBER RETENTION IN THE
ISP BUSINESS
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 the long-term
success of Telecom Wireless 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 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
Telecom Wireless' 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 subscriber
retention rates. Any decline in subscriber retention rates could have a material
adverse effect on Telecom Wireless' business, financial condition and operating
results.
<PAGE>
TELECOM WIRELESS FACES A POTENTIAL CASH SHORTFALL IF IT DOES NOT
ATTRACT NEW ISP SUBSCRIBERS
Management anticipates that a portion of the ISP sales of Telecom
Wireless 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 financial condition
of Telecom Wireless, 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, could force
management to raise additional capital to support operations by selling equity
securities or incurring additional debt.
ACQUISITIONS OF ISP SUBSCRIBERS MAY RESULT IN SUBSCRIBER CANCELLATIONS
DUE TO BILLING PROBLEMS AND UNFAMILIARITY WITH TELECOM WIRELESS'
SERVICE; ACQUISITIONS OF COMPANIES MAY DISRUPT TELECOM WIRELESS'
BUSINESS AND DISTRACT MANAGEMENT DUE TO DIFFICULTIES IN ASSIMILATING
PERSONNEL AND OPERATIONS
As part of management's growth strategy, Telecom Wireless may acquire
businesses, products, technologies and other assets, including ISP subscriber
accounts, or enter into joint venture arrangements, that complement our
businesses. In an acquisition of ISP subscribers, Telecom Wireless may
experience subscription
<PAGE>
cancellations in the short-term period following the acquisition due to the
lack of the acquired subscribers' familiarity with Telecom Wireless 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 our ongoing business
and distract management, as well as result in unanticipated costs and
difficulty in maintaining standards, controls and procedures. Management
cannot be certain that Telecom Wireless will succeed in overcoming these
risks or any other problems encountered in connection with any acquisitions
Telecom Wireless may make. In addition, Telecom Wireless 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.
TELECOM WIRELESS 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
be used to make obscene or indecent material available to minors via an
interactive computer service. As the law in this area develops, Telecom Wireless
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 our network. Any costs that Telecom Wireless incurs as a
result of contesting any such asserted claims or the consequent imposition of
liability could materially and adversely affect its business, financial
condition and operating results.
In addition, because materials may be downloaded by users of our
services or their customers and subsequently distributed to others, people may
make claims against Telecom Wireless 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. Telecom
Wireless also could be exposed to liability with respect to offering third-party
content that may be accessible through our services, including links to web
sites maintained by our subscribers or other third parties, or posted directly
to a web site of Telecom Wireless, and subsequently retrieved by a third party
through our services. If any third-party content provided through our services
contains errors, third parties who access such material could make claims
against Telecom Wireless for losses incurred in reliance on such information.
Telecom Wireless may also offer e-mail services, which would expose Telecom
Wireless 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.
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
The market price of Telecom Wireless' 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. A drop in the market price could
adversely affect holders of the stock and could also harm Telecom Wireless'
ability to raise additional capital by selling equity securities. Telecom
Wireless is in the process of registering a substantial number of shares of
its common stock for future sale. In addition, based on a market price of the
common stock of $7-7/8 per share as of January 28, 2000, Telecom Wireless had
outstanding options, warrants and convertible securities for the purchase of
up to approximately 8,128,764 shares of common stock at an average exercise
price of $8.38 per share, representing approximately 33% of the company's
outstanding shares of common stock on a fully-diluted basis. 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 Telecom Wireless' common stock. In addition, shares issued by
Telecom Wireless in private transactions over the past two years will become
eligible for sale into the public market under SEC Rule 144.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. 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 in
Item 1 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
<PAGE>
registration statement and Telecom Wireless 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.
<PAGE>
OVERVIEW
The goal of Telecom Wireless Corporation is to become a leading
consolidator in the highly fragmented Internet service provider or "ISP"
industry and in the competitive local exchange carrier or "CLEC" industry.
Telecom Wireless intends to achieve this goal 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. Telecom Wireless will attempt
to reduce customer turnover, or "churn," by maintaining a local presence for
acquired businesses.
Telecom Wireless currently operates an ISP 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 Telecom Wireless 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
many ISP businesses. This has often resulted in sharply increased subscriber
churn rates after acquisitions and subsequent loss of revenue. We intend to
structure our integration and consolidation efforts to retain the perception by
subscribers of ISP businesses that we acquire that their ISP is a local business
providing superior service to that of national services.
INTEGRATION TEAMS. To help integrate operations, Telecom Wireless 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
<PAGE>
branding of the local company as a part of the Telecom Wireless organization.
Additionally Telecom Wireless' 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 Telecom Wireless to expand its customer base and
improve its customer retention.
CONSOLIDATION OF FUNCTIONS. The two major expenses associated with most
ISP and CLEC operations are administrative, primarily personnel, and technical,
including upstream telecommunications and local area networks. 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 can be achieved.
- ACCOUNTING: A high priority for Telecom Wireless is the
installation of a common accounting platform across all ISP
acquisitions. 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: Telecom Wireless 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 a single 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, local area network, 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 a local exchange carrier.
Telecom Wireless 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
<PAGE>
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, or
VoIP, which allows users to place long distance telephone calls over the
Internet at a very low cost. By installing new hardware that supports not only
this service but the traditional ISP services, Telecom Wireless will be able to
begin offering these types of service to the existing subscribers of acquired
ISPs and CLECs.
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.
WIRELESS BROADBAND NETWORK
Telecom Wireless intends to establish broadband wireless communications
networks in North America for small and medium sized businesses and consumers.
These networks would allow simultaneous real time transmission of voice, video
and data over the Internet. Subject to a trial test of equipment by Keys
Microcable Corporation, we have entered into a contract to purchase, over a
period of five years, $225 million of equipment and services necessary to
establish the networks. Other related costs will be substantial such as
infrastructure, including location agreements for transmitters and receivers,
installation and marketing, and sales. We presently plan to market the wireless
broadband services to subscribers of ISPs we acquire and others in the
communities served by those ISPs.
ABILITY TO IMPLEMENT BUSINESS PLAN
The ability of Telecom Wireless to remain in business and implement its
business plan depends upon a variety of factors, primarily the ability to obtain
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 implementing the company's business plan. We need
capital to sustain operations and to consummate acquisitions. Management can
give no assurance that Telecom Wireless' capital requirements can be satisfied
at all or on reasonable terms.
COMBINED RESULTS OF OPERATIONS
REVENUES. Telecom Wireless Corporation and its subsidiaries
historically have derived their revenues primarily from subscription fees paid
by ISP
<PAGE>
subscribers for dial-up access to the Internet 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.
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.
<PAGE>
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
<PAGE>
percentage of revenues of acquired businesses through standardization of
procedures and documents.
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.
<PAGE>
DISCUSSION OF THE OPERATIONS OF TELECOM WIRELESS CORPORATION
During the fiscal quarter ended June 30, 1999, present management
assumed control of Telecom Wireless and started to plan, document and implement
its merger and acquisition 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, field personnel were actively seeking letters of intent from
acquisition targets. The initial M&A sales and marketing team was later expanded
from two senior managers and one support person to include two more in sales and
two in operations.
Between April and September 1999 Telecom Wireless 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 Telecom Wireless' common stock. On December 30, 1999,
the acquisition of Prentice was rescinded. In addition, the remaining three
definitive agreements expired by September 30, 1999.
For the years ended June 30, 1998 and 1999, Telecom Wireless had
revenues of $650,000 and $523,000, 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 television operations of Keys Microcable Corporation, a wholly-owned
subsidiary of Telecom Wireless. 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.
Currently, wireless cable television services are not part of our
strategic plan as the small market
<PAGE>
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 including the plan for
deployment of wireless broadband services described above. By utilizing Keys
Microcable's 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 performance of Keys Microcable, Telecom Wireless is making
investments in equipment and subscriber services.
For the year ended June 30, 1999, and the quarter ended September 30,
1999, Telecom Wireless 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 Telecom Wireless
obtains adequate funding for that purpose. Management expects that the 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, Telecom Wireless will be required
to acquire or build a national infrastructure and establish and train
integration and consolidation teams. Since Telecom Wireless has made few
acquisitions, the staff presently required to manage integration and
consolidation is minimal. However, when funding for operations and acquisitions
is obtained, significant additional investment in technical and integration
personnel will be required.
DISCUSSION OF THE RESULTS OF OPERATIONS OF KEYS MICROCABLE CORPORATION
Keys Microcable Corporation, a Florida Corporation which may be
referred to as "KMC", provides wireless cable television services in Key West,
Florida.
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:
<PAGE>
- 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 of 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
properties and government agencies could substantially increase the total
subscriber count by the end of the current fiscal year.
KMC provides Telecom Wireless with a wireless platform on which to add
additional "bundled" services such as Internet access and voice over internet
protocol or 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 is anticipated to generate incremental annual revenues
in excess of $240,000.
<PAGE>
DISCUSSION OF AMERICA'S WEB STATION, INC. RESULTS OF OPERATIONS
America's Web Station, Inc., which we sometimes refer to as "AWS," 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. Dial-up
Internet access 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 Telecom Wireless 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.
<PAGE>
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a pro forma combined basis, Telecom Wireless had a negative cash
flow from operations of $1,535,000 and $1,340,000 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, Telecom Wireless has funded its operations and
working capital needs primarily through private placements of its equity
securities and short-term debt instruments, lease financing and increases in
current liabilities. These private placements are discussed in Notes 7, 10 and
14 of the consolidated financial statements of Telecom Wireless Corporation
included in this registration statement.
In addition to normal operating expenses and current indebtedness,
Telecom Wireless has incurred substantial obligations payable during 2000
including the following:
- Telecom Wireless 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 Telecom Wireless
and its subsidiaries having a maximum aggregate purchase price of
$20,000,000. Telecom Wireless may lease equipment with a value of up to
$5,000,000 without having to satisfy certain covenants and financial
ratios. To date, Telecom Wireless has received equipment having a value
of approximately $1.2 million. Most of the equipment presently is in
storage in Albuquerque, New Mexico, awaiting field deployment. Lease
payments for the rental of this equipment, increasing to approximately
$47,000 per month by
<PAGE>
March 2000, were scheduled to commence in November 1999, but have been
suspended pending completion of an inventory of equipment delivered.
The Master Lease Agreement meets the requirements of an operating lease
for accounting purposes.
- In December 1999, Telecom Wireless entered into an agreement with
Adaptive Broadband Corporation to purchase broadband wireless
telecommunications equipment and services to establish wireless
communications networks in North America for small- and medium-sized
businesses and consumers. The agreement requires expenditures over its
five-year term of approximately $225 million by Telecom Wireless.
Telecom Wireless is obligated to, but has not yet placed, a purchase
order in the amount of $13,635,375 covering equipment to be delivered
this year including equipment to conduct a trial test through Keys
Microcable Corporation. By March 15, 2000 or upon successful completion
of the test plan, whichever is earlier, Telecom Wireless must pay
Adaptive $3,450,090. Additional payments of $3,392,290 each are due on
the first day of June, September and December 2000. Telecom Wireless
may terminate the agreement without penalty at any time if Adaptive's
product technology is not reasonably competitive in the fixed wireless
broadband market.
Adaptive may terminate the Agreement if it is not satisfied with the
sales or promotional performance of Telecom Wireless. If Telecom
Wireless fails to purchase the amount of equipment specified in the
agreement by the end of any calendar year, it will be subject to a
penalty equal to five percent of the unpurchased equipment. In the
event of termination by Telecom Wireless without cause or termination
by Adaptive with cause, then Telecom Wireless must pay Adaptive five
percent of the purchase price of the unpurchased equipment for the
remainder of the term of the agreement.
- A convertible promissory note in the principal amount of $700,000 is
due and payable in full on April 30, 2000. The conversion rate is $7.00
per share of common stock. Although the holder has registration rights
with respect to the common stock, it is probable the holder will not
exercise the conversion right unless the market price is substantially
higher than the conversion price on the conversion date.
- Hyperlight Network Corporation claims Telecom Wireless is obligated to
pay it $900,000, of which $300,000 purportedly was due December 1,
1999, and $300,000 purportedly is due on each of March 1 and June 1,
2000. The parties are negotiating an agreement to defer the due date of
the past due amount, if any, to February 29, 2000, and, if Telecom
Wireless does not have sufficient cash on that date, to allow payment
in its common stock.
When present management assumed control of Telecom Wireless in
mid-April, 1999, the market for Internet and Internet-related stocks was strong.
However, beginning in July 1999, the market for many of such securities
weakened, and the market prices of many Internet stocks fell by 50% or more.
Even though market prices for some Internet-based companies have rebounded, it
has become increasingly difficult for Telecom Wireless to obtain financing,
either debt or equity, to fund operations or acquisitions. This has forced
Telecom Wireless to obtain high cost short-term financing to cover operating
expenses and to delay closings of acquisitions.
Telecom Wireless has adopted a three-pronged financing plan:
<PAGE>
- 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, Telecom Wireless 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 Telecom Wireless
be unsuccessful in its efforts to raise capital, it may be required to curtail
operations.
FINANCING ARRANGEMENTS
JACK AUGSBACK & ASSOCIATES, INC. In March 1999, Telecom Wireless
entered into an agreement whereby Jack Augsback & Associates, Inc., West Palm
Beach, Florida, agreed to research and find sources for Telecom Wireless'
various needs of financing and to make introductions to persons capable of
providing such financing to Telecom Wireless. Telecom Wireless agreed to
compensate Augsback in the form of fees of up to 10% of gross proceeds to
Telecom Wireless, stock purchase warrants and expense reimbursement. The
Augsback agreement was effective through December 31, 1999. Pursuant to that
agreement, Augsback introduced Telecom Wireless to investors who purchased
securities for net proceeds to Telecom Wireless aggregating approximately
$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 Telecom
Wireless and introduced Telecom Wireless to a person which loaned it $700,000.
Telecom Wireless agreed to compensate First Equity in the form of fees of up to
10% of gross proceeds to Telecom Wireless, stock purchase warrants and expense
reimbursement.
On October 15, 1999, Telecom Wireless entered into a supplemental
agreement with First Equity whereby the company agreed, among other things, to
issue five-year warrants to First Equity to purchase 300,000 shares of Telecom
Wireless' common stock at a price of $.001 per share and to provide piggyback
registration rights for the underlying shares. In consideration, First Equity
agreed to waive fees due and payable to it. First Equity has exercised the
warrant.
HAMPTON-PORTER. In December 1999 Telecom Wireless entered into an
Investment Banking Agreement with Hampton-Porter Investment Bankers. Under the
agreement, Hampton-Porter agreed to perform a variety of services on a best
efforts basis including advice and counsel regarding strategic business and
financial plans, negotiations with potential investors, acquisition candidates,
strategic partners and others, introductions to securities broker-dealers,
information and analysis of market-making activities in the common stock of
Telecom Wireless, and due
<PAGE>
diligence investigations of third persons at the request of management. The
agreement required a non-refundable fee of $500,000 or 550,000 shares of the
common stock of Telecom Wireless and three-year warrants for the purchase of
an additional 1,000,000 shares exercisable at $5.50 per share. If the 550,000
shares are not free-trading by March 21, 2000, then Telecom Wireless will be
obligated to issue an additional 200,000 shares to Hampton-Porter as a
penalty. The 550,000 shares have been included in this registration
statement. The shares issuable upon exercise of the warrants also have
registration rights.
In addition, Telecom Wireless agreed to pay Hampton-Porter finder's
fees up to five percent of the value of transactions introduced by
Hampton-Porter to Telecom Wireless. The term of the agreement is one year
although it can be terminated by either party on five days' notice.
In January 2000, Hampton-Porter served as placement agent in a
non-public offering to one investor of 100,000 shares of Telecom Wireless common
stock for a purchase price of $2.50 per share and three-year warrants for the
purchase of an additional 75,000 shares at an exercise price of $2.50 per share
for which Telecom Wireless has agreed to pay additional fees.
YEAR 2000 READINESS
Management is not aware of any year 2000 problems experienced or yet to
be resolved by Telecom Wireless or its subsidiaries or any of their major
vendors or service providers. Year 2000 problems are 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. The concern was that lack of year 2000 readiness
could have resulted in system failures or miscalculation causing disruptions of
operations.
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
Telecom Wireless' principal executive offices are located in
approximately 8,215 square feet of leased space at 5299 DTC Boulevard, Suite
1120, Englewood, Colorado 80111. The current monthly lease payment is $16,800.
The lease expires in 2002.
Telecom Wireless 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
Telecom Wireless' business plan, it has advised the landlord that it does not
intend to occupy the premises and the landlord has declared Telecom Wireless 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 Telecom Wireless, operates
out of 1,584 square feet of leased space in Naples, Florida. Telecom Wireless'
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 January 28,
2000, with respect to each person who owned of record as of that date or is
known to Telecom Wireless 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 Telecom Wireless and by all the executive
officers and directors as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL
POSITIONS AND OFFICES COMMON STOCK PERCENT OF
NAME AND ADDRESS HELD OWNERSHIP CLASS
- --------------------------------------- -------------------------------- ------------------------- -----------------
<S> <C> <C> <C>
James C. Roberts Chairman of the Board 10,916,333(1) 66.3%
5299 DTC Blvd., #1120 of Directors and Director
Englewood, CO 80111
<PAGE>
Calvin D. Smiley Chief Executive Officer, 161,611(2) 1.0%
5299 DTC Blvd., #1120 President and Director
Englewood, CO 80111
Kosta S. Kovachev Chief Financial Officer and 750,000 4.6%
580 Village Blvd., #140 Director
West Palm Beach, FL 33409
Robert L. Fredrick Senior Vice President 500,000 3.0%
580 Village Blvd., #140
West Palm Beach, FL 33409
Allen Leeds Stockholder 1,000,000 6.1%
108 17th Street
Bellair Beach, FL 34635
HyperLight Network Corporation Stockholder 952,381 5.8%
188 North Lake Drive
Naples, Florida 34102
Hampton-Porter Investment Bankers Stockholder 1,550,000(3) 8.6%
600 W. Broadway, 14th Floor
San Diego, CA 92101
All executive officers and directors 12,327,945 74.6%
of Telecom Wireless as a group (four
persons)
</TABLE>
<PAGE>
(1) Of the shares beneficially owned by Mr. Roberts, 10,616,333 are owned
of record by The Roberts Family Trust, of which Mr. Roberts and Lynne
K. Roberts, his spouse, are sole trustees, and 300,000 are owned of
record by Mrs. Roberts.
(2) Includes 61,611 shares issuable upon exercise of presently-exercisable
warrants.
(3) Includes 1,000,000 shares issuable upon exercise of
presently-exercisable warrants.
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following table identifies the directors and executive officers of
Telecom Wireless:
<TABLE>
<CAPTION>
Beginning of Term of
Name Age Positions Held Service as Director
- -------------------------- --- -------------------------------------- ----------------------
<S> <C> <C> <C>
James C. Roberts 46 Chairman of the Board of Directors 4/99
Calvin D. Smiley 46 Chief Executive Officer, President 4/99
and Director
Kosta S. Kovachev 48 Chief Financial Officer and Director 4/99
Robert L. Fredrick 54 Senior Vice President 4/99
</TABLE>
No arrangements exist between directors, officers, or other persons
which resulted in the selection or election of any of the above-named persons.
All directors hold office until the next annual meeting of shareholders or until
their successors are duly elected and qualified. Officers serve at the pleasure
of the board of directors. Mr. Roberts and Lynne K. Roberts, an officer of
Telecom Wireless whose professional qualifications are discussed below, are
husband and wife.
The principal occupations of each executive officer and director of
Telecom Wireless for at least the past five years are as follows:
JAMES C. ROBERTS, 46, has served as Chairman of the Board of Directors
and a director of Telecom Wireless since April 1999 and served as Chief
Executive Officer from April 1999 until January 2000. Mr. 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, Mr. 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, Mr. Roberts was responsible for building and operating over
50 cellular, paging and cable TV systems. Mr. 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.
<PAGE>
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 and in January 2000 was elected Chief Executive Officer. 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 management
and executive positions with TeleCommunications, Inc. in advertising sales and
marketing. He held various positions in radio and television before joining TCI.
KOSTA S. KOVACHEV, 48, has been an officer and director of Telecom
Wireless since May 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 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.
<PAGE>
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.
ESPER GULLATT JR., 41, has been an officer of Telecom Wireless since
April 1999. He was appointed Vice President-Business Development of Telecom
Wireless 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.
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
<PAGE>
pursued graduate studies 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 that 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
Telecom Wireless who are not employed by Telecom Wireless. The purpose of the
Advisory Board is to provide information and guidance to the Board of Directors
with respect to Telecom Wireless' business, including technological advances,
pricing strategies, electronic content and services, and financial and
operational structure. To date, only one member of the advisory board has been
identified. When Telecom Wireless obtains the funding required to implement its
business plan, it is expected that the Board of Directors of the company expects
to identify additional advisory board members based upon their experience,
education and other qualifications. To date, no compensation arrangements have
been made for advisory board members.
JOHN H. SUNUNU is the sole current member of the Advisory Board.
Governor 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 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.
<PAGE>
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 Telecom Wireless
during the fiscal year ended June 30, 1999.
Telecom Wireless has entered into written employment agreements with
three of its four executive officers, but has no written employment agreement
with Mr. Roberts. Except as to Mr. Kovachev, each written 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. Mr. Kovachev's employment
agreement will terminate in July 2000. The annual salaries payable by Telecom
Wireless to the executive officers under these agreements and to Mr. Roberts
under an oral understanding with the company's board of directors 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
</TABLE>
Under the written employment agreements, Telecom Wireless may terminate
the officer's employment at its discretion at any time during the initial
three-year term. However, Telecom Wireless 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 Telecom Wireless
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 Telecom Wireless.
All officers of Telecom Wireless are eligible to participate in the
executive bonus pool, which is fixed at an amount equal to five percent of the
company's adjusted net profits 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.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table provides
information on options granted to the executive officers of Telecom Wireless
during the fiscal year ended June 30, 1999. All such options are non-qualified
options exercisable at the market price of a share of Telecom Wireless' common
stock on the date of grant. The options have no value unless Telecom Wireless'
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 Telecom Wireless. The options reflected in the table were
granted before adoption of Telecom Wireless' 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)
PERCENT OF TOTAL
NUMBER OF 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% $10.55 Apr. 13, 2004
</TABLE>
- -------------------
* Canceled under oral agreement effective in January 2000.
OPTION EXERCISES AND VALUES. None of the options granted to the
executive officers of Telecom Wireless before the end of fiscal year 1999 were
exercisable before the end of that year. In accordance with Securities and
Exchange Commission regulations, the following table nevertheless provides
information on
<PAGE>
exercises of stock options during the fiscal year and the fiscal year-end
value of unexercised options:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Shares Value Unexercised In-the-Money
Acquired on Realized Options at Fiscal Options at Fiscal
Name Exercise (#) ($) Year End (#) 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
</TABLE>
- ------------------
* Canceled under oral agreement effective in January 2000.
RECENT GRANT OF OPTIONS. In connection with Mr. Smiley's appointment as
chief operating officer of Telecom Wireless in August 1999, Telecom Wireless
granted him options to purchase 300,000 shares of common stock at an exercise
price of $14.42 per share, the market price of a share of Telecom Wireless'
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
Telecom Wireless' 1999 Stock Option and Restricted Stock Plan.
<PAGE>
1999 STOCK OPTION AND RESTRICTED STOCK PLAN
The Board of Directors of Telecom Wireless adopted Telecom Wireless'
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 Telecom Wireless' common stock may be issued to grantees and
recipients under the plan. The plan allows issuance of both qualified or
incentive stock options and non-qualified options as well as awards of shares of
restricted stock and by its terms continues in effect for ten years. Options and
stock awards may 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 may ask shareholders at
the next annual meeting to increase the number of shares of common stock
reserved for issuance under the 1999 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 Telecom Wireless' 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 Securities and
Exchange Commission 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 Telecom Wireless
or a subsidiary of Telecom Wireless are eligible for
<PAGE>
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.
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
Telecom Wireless 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 Telecom Wireless 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 grant of a stock award until the optionee or recipient pays the
exercise price in full, or makes any payment required under a stock grant
agreement, and pays 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.
<PAGE>
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, the value attributed to Phoenix for
accounting purposes was nil. Prior to the transaction, it appears Telecom
Wireless did not have sufficient cash to cover the negative cash flow of its
subsidiary, Keys Microcable Corporation, and was insolvent. The then board of
directors determined that the share exchange was advisable due to the proposal
of the stockholders of Phoenix to provide interim funding, new management and a
long-term management and finance plan.
The stockholders of Phoenix included several present and former members
of the 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:
<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 Mr. Roberts and
his spouse, Lynne K. Roberts, are sole trustees.
<PAGE>
JOHN H. SUNUNU
On August 31, 1999, Telecom Wireless entered into a Services Agreement
with John H. Sununu, a member of Telecom Wireless' Advisory Board. The Services
Agreement requires Governor Sununu to render financial consulting and other
services to Telecom Wireless 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 Telecom Wireless' common stock at an exercise price of $5.50 per
share. The closing price of Telecom Wireless' 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
Telecom Wireless' 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 Telecom Wireless' 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. Telecom Wireless 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 Telecom
Wireless' publicly traded common stock on the trading day immediately before
Governor Sununu's purchase was $14.38 per share.
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 Telecom Wireless, entered into a management agreement through an
entity controlled by them whereby they were to receive a 50% equity interest in
Keys Microcable Corporation, a wholly-owned subsidiary of Telecom Wireless, in
consideration of the performance of management services. At that time, Messrs.
Smiley and Gullatt were not associated with Telecom Wireless, so that the
agreement was negotiated at arms' length. However, this agreement was
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, which was 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 Telecom Wireless.
LOAN TO OFFICER
<PAGE>
In August 1999, Telecom Wireless loaned $60,000 to Kosta S. Kovachev, a
director of Telecom Wireless and then one of its executive officers. In January
2000 Mr. Kovachev and Telecom Wireless entered into an oral agreement whereby
his employment agreement will terminate in July 2000 and non-qualified options
for the purchase of 1,000,000 shares held by him will be canceled. In addition,
he agreed to deposit 375,000 shares of Telecom Wireless common stock owned by
him into escrow. If certain performance targets are met, the loan will be
forgiven, in whole or in part, and all or a portion of the escrowed shares will
be returned to him.
LOAN FROM OFFICER
In October 1999, James C. Roberts, Chairman of the Board of Directors
of Telecom Wireless, sold an option to Mr. Mailman to purchase 250,000 shares of
Telecom Wireless' common stock from Mr. Roberts for $250,000. The term of the
option is two years and the option exercise price is $.10 per share. Mr. Roberts
loaned the $250,000 to Telecom Wireless. Mr. Mailman has registration rights
with respect to the shares for which the option is exercisable. In January 2000,
the board of directors of Telecom Wireless approved the issuance of 250,000
shares of its common stock to Mr. Mailman in satisfaction of the loan. Mr.
Roberts, a director, abstained from voting on this transaction.
Telecom Wireless has entered into a consulting agreement with Mr.
Mailman. Mr. Mailman and Allen Leeds, formerly an officer of Telecom Wireless,
are the co-owners of First Broadcast Partners, LLC, a wireless spectrum holding
company based in New York, New York.
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of Telecom Wireless consists of
100,000,000 shares of common stock, par value $.001 per share, and 25,000,000
shares of preferred stock, par value $.001 per share. As of January 21, 2000,
Telecom Wireless had 16,455,009 shares of common stock outstanding, held by 452
stockholders of record, and was obligated to issue 20,000 shares of preferred
stock to one stockholder.
DESCRIPTION OF COMMON STOCK
All shares of Telecom Wireless' 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
<PAGE>
majority of the issued and outstanding shares of common stock will be able to
elect all Telecom Wireless' directors should they choose to do so. Each
holder of common stock, upon liquidation of Telecom Wireless, is entitled to
receive a pro rata share of Telecom Wireless' assets available for
distribution to common stockholders.
DESCRIPTION OF PREFERRED STOCK
The board of directors of Telecom Wireless has the authority to
issue shares of the company's preferred stock in one or more series, and to
fix the designation, powers, preferences and rights of the shares of each
such series and the qualifications, limitations and restrictions of the
series. As of the date of this registration statement, the board has
authorized the issuance of 20,000 shares of preferred stock in one series,
designated as Redeemable, Non-Voting, Convertible Preferred Stock - Series
1998-1. Telecom Wireless is obligated to issue all the shares of such series.
Holders of this series are entitled to such dividends as the board of
directors of the company may declare. They have no voting rights and are not
entitled to notices of meetings of stockholders. The Series 1998-1 preferred
stock is convertible into shares of Telecom Wireless common stock, at the
option of the holders, at the conversion rate described below, upon the
filing of a registration statement with the Securities and Exchange
Commission for a public offering of shares of Telecom Wireless. If not
previously converted, these preferred shares are redeemable by Telecom
Wireless at their liquidation value at any time after December 31, 2004. The
liquidation value is $100 per share plus any accumulated but unpaid
dividends. The number of shares into which each share of Series 1998-1
<PAGE>
preferred stock is to be converted will be determined by multiplying the
number of shares being converted by the conversion rate, which is a fraction
(a) the numerator of which is $100 and (b) the denominator of which is 125%
of the price at which a share of Telecom Wireless common stock is offered to
the public under the registration statement for the public offering.
<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
or 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 or that an active
trading market will be sustained. Moreover, the trading price of Telecom
Wireless' 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 Telecom Wireless or its
competitors, product enhancements by Telecom Wireless 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 following table sets forth the range of high and low bid quotations
for Telecom Wireless' common stock for each of the quarters within the last two
fiscal years:
<TABLE>
<CAPTION>
HIGH AND LOW BID PRICES
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
<PAGE>
Third Quarter $ 8-1/8 $18-3/4
Fourth Quarter $ 3-3/4 $18
</TABLE>
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 January 21, 2000, Telecom Wireless had 16,455,009 shares of
common stock outstanding, held by 452 stockholders of record, and was obligated
to issue 20,000 shares of preferred stock to one stockholder.
(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 on future earnings, future
capital needs and the registrant's operating and financial condition, among
other factors.
(d) SHARES AVAILABLE FOR FUTURE SALE
The market price of Telecom Wireless' 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. A drop in the market price could
adversely affect holders of the stock and could also harm Telecom Wireless'
ability to raise additional capital by selling equity securities. Telecom
Wireless is in the process of registering a substantial number of shares of
its common stock for future sale. In addition, based on a market price of the
common stock of $7-7/8 per share as of January 28, 2000, Telecom Wireless had
outstanding options, warrants and convertible securities for the purchase of
up to approximately 8,128,764 shares of common stock at an average price of
$8.38 per share, representing approximately 33% of the company's outstanding
shares of common stock on a fully-diluted basis. 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
Telecom Wireless' common stock. In addition, Telecom Wireless has entered
into registration rights agreements with certain of its stockholders
entitling them to include their shares of common stock in registration
statements for securities filed by Telecom Wireless under the Securities Act
of 1933, as amended. 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 Telecom Wireless' ability to
obtain capital through sales of equity securities. In addition, shares issued
by Telecom Wireless in private transactions over the past two years will
become eligible for sale in the public market under SEC Rule 144.
These shares are restricted securities as defined in Rule 144. Under
that rule, a stockholder who owns restricted shares that have been
outstanding for at least one year is entitled to sell, within any three-month
period, a number of restricted shares that does not exceed the greater of 1%
of the then outstanding shares of common stock, or approximately 164,550
shares as of January 21, 2000, or the average weekly trading volume in the
common stock during the four calendar weeks preceding the sale. Approximately
13,825,000 shares issued in April 1999 in the transaction in which current
management assumed control of Telecom Wireless will be eligible for sale
under Rule 144 on or about April 13, 2000.
In addition, 90 days after effectiveness of this registration
statement, 190,994 shares issued to employees and consultants under SEC Rule
701 will become eligible for sale in the public market. Finally, Telecom
Wireless intends to register for public sale all other shares issued to
officers, employees, consultants and others in compensatory transactions
shortly after effectiveness of the registration statement of which this
prospectus is a part. Telecom Wireless intends to include in the registration
shares issuable upon exercise of compensatory stock options and stock
purchase warrants that are not eligible for public sale. As of January 28,
2000, the number of such shares that Telecom Wireless intends to include in
the registration totaled 5,352,186 shares.
Officers of Telecom Wireless holding an aggregate of 12,466,333
shares of its common stock and options and warrants for the purchase of an
additional 2,923,222 shares of common stock have entered into stock sale
restriction agreements whereby they agreed, among other things, that the
maximum amount each could sell during any period of 30 consecutive calendar
days would not exceed the lesser of $25,000 in gross proceeds or 5,000
shares; that no share would be sold for a price less than $4.25; and that
they would not engage in any short sales of the stock. The board of directors
may waive any of the restrictions on an individual basis and may terminate
the agreement at any time.
ITEM 2. LEGAL PROCEEDINGS
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 Telecom
Wireless' financial condition except as set forth below.
<PAGE>
Telecom Wireless is the defendant in Coker & Palmer, Inc. v. Telecom
Wireless Corporation, a lawsuit filed September 3, 1999, in the County Court of
the First Judicial District of Hinds County, Mississippi, Civil Action No.
251-99-4537-CO. Coker & Palmer alleges that Telecom Wireless failed to promptly
disclose to the public through the news media material information that would
reasonably be expected to affect the value of its securities or influence
investors' decisions in connection with a reverse stock split of Telecom
Wireless= common stock effected on or about May 4, 1999. Coker & Palmer alleges
that it incurred losses of $28,613 because of the failure and seeks that amount
in compensatory damages plus an unspecified amount in consequential and
incidental damages plus costs. Telecom Wireless has reached an agreement with
Coker & Palmer whereby Telecom Wireless will pay to Coker & Palmer the sum of
$14,300 in settlement of Coker & Palmer's claims.
Telecom Wireless entered into an office lease with One Clearlake Centre
VEF III, LLC, for approximately 7,439 square feet of office space. Prior to
taking occupancy of the space, Telecom Wireless notified the landlord that it
did not intend to occupy the space. The landlord has taken the position that
Telecom Wireless is now in default under the lease and has filed a complaint in
the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County,
Florida, Case No. CL 9910570-AD, seeking damages of approximately $900,000 for
the unpaid rent for the remaining term of the lease including court costs,
interest and a reasonable attorney=s fee. It is expected that court-ordered
mediation of the dispute will occur in the next few weeks.
As described in Item 1 above under "Potential Business Prospects,"
HyperLight Network Corporation claims Telecom Wireless is in default under
certain agreements, purports to have canceled some of those agreements and
has threatened to file a lawsuit against Telecom Wireless and Mr. Roberts,
Chairman of its Board of Directors. The claims HyperLight has threatened to
make include breach of contract, fraudulent concealment and fraudulent
misrepresentation of certain facts and breach of fiduciary duty. HyperLight
also may seek exemplary damages, although it has not specified the claimed
amount of actual or exemplary damages. Management of Telecom Wireless
believes it has meritorious defenses to any claims that may be made by
HyperLight and will vigorously defend any lawsuit filed by HyperLight.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In May 1999, the board of directors of Telecom Wireless appointed Ehrhardt
Keefe Steiner & Hottman P.C. to serve as its principal independent accountant
for the fiscal year ending June 30, 1999. Gerstle, Rosen & Associates, P.A.,
reported on the financial statements of Telecom Wireless for the fiscal year
ended June 30, 1998. Its report for that year noted that Telecom Wireless had
suffered recurring losses from operations that raised substantial doubt about
its ability to continue as a going concern. The same
<PAGE>
matter was emphasized in the auditor's report for the fiscal year June 30,
1999. There were no disagreements with the former accountants on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
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 Registrant 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. Prior management
has advised Registrant that all available books and records have been delivered
to current management. Registrant has no present affiliation with prior
management.
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 were 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.
<PAGE>
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 thereafter were sold to 28 persons for gross proceeds
aggregating $3,268,745. One such person was not an accredited investor.
Registrant also issued repricing warrants to purchasers in the offering.
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 were accredited
investors.
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
was an accredited investor, 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 Registrant's common
stock at a conversion price of $7.00 per share in consideration of the
assignment of certain technology-related equity interests.
<PAGE>
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 acquisitions of America's Web Station, Inc. and
Prentice Technologies, Inc. to three individuals. Two of the three
individuals were not accredited investors. In November and December 1999,
Registrant issued 942,381 shares of its common stock to one entity in
connection with its acquisition of certain technology-related equity
interests.
In November 1999, Registrant authorized the issuance of warrants for the
purchase of 300,000 shares of its common stock as partial consideration for
consulting services rendered by one financial consultant. In November 1999, the
consultant exercised the warrants. In January 2000, Registrant issued the shares
underlying the warrants to three individuals as directed by the holder of the
warrants.
In December 1999, Registrant issued to one person a promissory note in
the principal amount of $140,000. Registrant is obligated to issue up to 50,000
shares of its common stock pursuant to the terms of the promissory note.
In January 2000, Registrant issued 1,200,000 shares of its common stock
and warrants for the purchase of 1,000,000 shares of its common stock to three
persons in consideration of $625,000 in debt cancellation and investment banking
services to be rendered.
With respect to all of the transactions described above that
occurred after present management assumed control of Registrant
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, the Company believes all purchasers 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
<PAGE>
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.
On January 6, 2000, an independent NASD-licensed broker dealer sold
76,000 shares of Registrant's common stock for $190,000, believing such shares
could be sold pursuant to the exemption from registration provided by Section
3(b) of the Securities Act of 1933, as amended, as implemented by Rule 504 of
Regulation D. On January 21, 2000, corporate counsel advised Registrant that
there was a potential integration issue and the afore-referenced exemption might
not be available. On January 21, 2000, Registrant made a rescission offer.
Registrant has since instituted new corporate procedures to insure such
transactions do not occur in the future.
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
<PAGE>
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.
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.
<PAGE>
PART F/S
JUNE 30, 1999
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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Page
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TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
Independent Auditors' Reports....................................................................................F-1
Consolidated Financial Statements
Consolidated Balance Sheets..................................................................................F-3
Consolidated Statements of Operations........................................................................F-4
Consolidated Statement of Changes in Stockholders' 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-31
Financial Statements
Balance Sheets..............................................................................................F-32
Statements of Operations....................................................................................F-33
Statement of Changes in Shareholders' Equity................................................................F-34
Statements of Cash Flows....................................................................................F-35
Notes to Financial Statements...................................................................................F-36
AMERICA'S WEB STATION, INC.
Independent Auditors' Report....................................................................................F-42
Financial Statements
Balance Sheets..............................................................................................F-43
Statements of Operations....................................................................................F-44
Statement of Changes in Shareholders' Equity................................................................F-45
Statements of Cash Flows....................................................................................F-46
Notes to Financial Statements...................................................................................F-47
UNAUDITED PRO FORMA INFORMATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS.................................................................F-52
UNAUDITED PRO FORMA COMBINED STATEMENT OF CASH FLOWS.................................................................F-54
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS...........................................................F-56
</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 Subsidiaries (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, and 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.
Ehrhardt Keefe Steiner & Hottman PC
October 26, 1999
Denver, Colorado
F - 1
<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 financial position of Telecom Wireless Corporation
and Subsidiary at June 30, 1998, and the results of their operations and
their cash flows for the two years 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. 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
F - 2
<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 $ 615,998
Accounts receivable, net of allowance of $14,000 49,559 119,526
Accounts receivable - employees - 105,163
Stock subscription receivable (paid in full subsequent to year end) (Note 11) 352,666 -
--------------- ---------------
Total current assets 1,022,891 840,687
--------------- ----------------
Property and equipment, net (Note 4) 589,797 754,672
--------------- ----------------
Intangible assets
Subscribers list (Note 3) - 225,000
Licenses (Note 14) 523,117 523,117
Goodwill (Note 3) - 177,980
Less accumulated amortization (208,247) (242,049)
--------------- ----------------
Net intangible assets 314,870 684,048
--------------- ----------------
Investment in subsidiary (Note 3) - 2,754,942
Idle equipment (Note 14) 181,256 174,285
Deferred acquisition costs - 391,858
Deferred offering costs - 100,850
Other assets 18,961 20,869
--------------- ----------------
Total assets $ 2,127,775 $ 5,722,211
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 618,006 $ 1,701,275
Short-term notes payable (Note 7) - 1,294,135
Accrued expenses (Note 5) 140,703 37,003
Current portion of notes payable (Note 8) - 5,662
--------------- ----------------
Total current liabilities 758,709 3,038,075
Note payable, less current portion (Note 8) - 7,772
--------------- ----------------
758,709 3,045,847
--------------- ----------------
Commitments and contingencies (Notes 6, 10, 11, 14 and 15)
Stockholders' equity (Notes 9, 10, 11 and 12)
Preferred stock, $.001 par value, 25,000,000 shares authorized, 20,000 shares
subscribed 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 (unaudited) (September 30, 1999) shares
issued and outstanding 15,108 15,754
Additional paid-in capital 6,950,836 11,096,023
Accumulated deficit (6,964,946) (9,827,920)
--------------- ----------------
Total stockholders' equity 1,369,066 2,676,364
--------------- ----------------
Total liabilities and stockholders' equity $ 2,127,775 $ 5,722,211
=============== ================
</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 636,074 517,261 137,859 138,390
Other 13,904 5,393 6,495 4,075
-------------- -------------- -------------- --------------
Total revenues 649,978 522,654 144,354 171,000
Internet service operating costs - - - 27,823
Direct costs - wireless TV 337,155 275,705 100,044 106,342
General and administrative 1,039,764 2,051,568 234,881 2,383,165
Stock based compensation (Note 11) 928,252 1,547,560 - 427,699
-------------- -------------- -------------- --------------
Total operating expenses 2,305,171 3,874,833 334,925 2,945,029
-------------- -------------- -------------- --------------
Net loss from operations (1,655,193) (3,352,179) (190,571) (2,774,029)
Other income (expense)
Interest expense - (1,114) - (64,506)
Accretion on preferred stock (Note 9) - (91,227) (22,807) (24,439)
-------------- -------------- -------------- --------------
- (92,341) (22,807) (88,945)
-------------- -------------- -------------- --------------
Net loss $ (1,655,193) $ (3,444,520) $ (213,378) $ (2,862,974)
============== ============== ============== ==============
Net loss per common share
Basic and diluted $ (15.08) $ (.92) $ (.05) $ (.19)
============== ============== ============== ==============
Shares used in computing net loss per common share
Basic and diluted 109,772 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 Additional Total
--------------------- --------------------- Accumulated Paid-in Stockholders'
Shares Amount Shares Amount Deficit Capital Equity
-------- ----------- ---------- --------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 - $ - 113 $ - (1,823,558) $ 1,721,246 $ (102,312)
Issuance of common stock for
acquisition - - 519,278 519 (41,675) 41,156 -
Sale of common stock - - 100,000 100 - 92,400 92,500
Issuance of stock for services - - 78,600 79 - 1,000,913 1,000,992
Issuance of preferred stock to
extinguish debt 20,000 1,276,841 - - - - 1,276,841
Net loss - - - - (1,655,193) - (1,655,193)
-------- ----------- ---------- --------- ------------ -------------- -----------
Balance - June 30, 1998 20,000 1,276,841 697,991 698 (3,520,426) 2,855,715 612,828
Accretion on preferred stock (Note 9) - 91,227 - - - - 91,227
Issuance of stock for services - - 12,000 12 - 29,988 30,000
Sale of common stock - - 155,144 155 - 290,403 290,558
Common stock issued in connection
with business reorganization
(Note 3) - - 13,825,000 13,825 - (13,825) -
Proceeds of private offering (net
of offering costs of $83,095)
(Note 10) - - 120,000 120 - 516,785 516,905
Proceeds of private offering (net
of offering costs of $359,994)
(Note 10) - - 297,785 298 - 1,724,210 1,724,508
Stock based compensation (Note 11) - - - - - 1,547,560 1,547,560
Net loss - - - - (3,444,520) - (3,444,520)
-------- ----------- ---------- --------- ------------ -------------- -----------
Balance - June 30, 1999 20,000 1,368,068 15,107,920 15,108 (6,964,946) 6,950,836 1,369,066
Proceeds from Private Offering
(net of offering costs of
$95,625) (Note 10) (unaudited) - - 127,935 128 - 641,242 641,370
Proceeds from Private Offering
(net of offering costs of
$59,382) (Note 10) (unaudited) - - 97,227 97 - 387,772 387,869
Accretion on preferred stock
(Note 9) (unaudited) - 24,439 - - - - 24,439
Stock issued for acquisition of
America's Web (Note 3) (unaudited) - - 28,562 29 - 199,902 199,931
Stock based compensation (Note 11)
(unaudited) - - 27,707 28 - 305,171 305,199
Stock issued for acquisition of
Prentice (Note 3 and 15) (unaudited) - - 346,667 347 - 2,426,322 2,426,669
Stock issued for services (Note 14)
(unaudited) - - 17,500 17 - 122,483 122,500
Warrants issued in conjunction with
bridge loan (Note 7) (unaudited) - - - - - 62,295 62,295
Net loss (unaudited) - - - - (2,862,974) - (2,862,974)
-------- ----------- ---------- --------- ------------ -------------- -----------
Balance - September 30, 1999
(unaudited) 20,000 $ 1,392,507 15,753,518 $ 15,754 $ (9,827,920) $ 11,096,023 $ 2,676,364
======== =========== ========== ========= ============ ============== ===========
</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
-------------- -------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (1,655,193) $ (3,444,520) $ (213,378) $ (2,862,974)
-------------- -------------- -------------- --------------
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 370,423 255,978 62,646 94,163
Stock issued for services 72,741 30,000 30,000 122,500
Stock based compensation 928,252 1,547,560 - 305,199
Warrants issued - - - 62,294
Loss on sale of equipment 18,942 - - -
Accretion on preferred stock - 91,227 22,807 24,439
Changes in assets and liabilities
Accounts receivable (1,803) 12,245 (4,612) (55,074)
Other assets - (3,880) (2,830) 1,049
Accounts payable 127,320 (14,510) (6,273) 1,072,337
Accrued expenses 2,831 104,445 (28,049) (103,699)
Cash overdraft (2,333) - - -
-------------- -------------- -------------- -------------
1,516,373 2,023,065 73,689 1,523,208
-------------- -------------- -------------- --------------
Net cash used by operating activities (138,820) (1,421,455) (139,689) (1,339,766)
-------------- -------------- -------------- --------------
Cash flows from investing activities
Purchase of equipment (29,244) (121,117) (8,911) (164,726)
Cash acquired from acquisitions - - - 5,878
Acquisition costs - - - (554,884)
License development costs (18,297) - - -
-------------- -------------- -------------- -------------
Net cash used by investing activities (47,541) (121,117) (8,911) (713,732)
-------------- -------------- -------------- --------------
Cash flows from financing activities
Net activity - due to officer 94,461 (16,667) (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 186,961 2,162,638 148,000 2,048,830
-------------- -------------- -------------- --------------
Net increase (decrease) in cash 600 620,066 (600) (4,668)
Cash at beginning of period - 600 600 620,666
-------------- -------------- -------------- --------------
Cash at end of period $ 600 $ 620,666 $ - $ 615,998
============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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).
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>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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. The purpose of the merger
was to provide immediate interim funding for the operations of the Company as
Keys' had significant liabilities and no cash to meet its needs. The merger
resulted in an immediate takeover of the Company's management, which
represented a long-term management and financial plan to assure the viability
of the Company. 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") 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 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>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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 as of September 30, 1999
(unaudited) (Note 3). Affiliated companies in which Telecom does not have a
controlling interest, or which control is likely to be temporary are
accounted for under the equity method. As of September 30, 1999 the Company's
investment in 90% of Prentice Technologies has been recorded under the equity
method due to the Company having temporary control of Prentice (Notes 3 and
15). 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), goodwill is amortized over its economic life of 3 years and
subscriber lists are amortized over 3 years.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs consist of costs associated with the Company's
investigation of potential future acquisitions. Indirect acquisition costs,
including salaries, are expensed as incurred. These costs will be capitalized
upon completion of the acquisition or charged to expense if the acquisition
is unsuccessful.
F - 9
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
LONG-LIVED ASSETS
The Company assesses valuation of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121 (SFAS 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 television revenue and internet service revenue consist 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.
F - 10
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
In accordance with the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 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, stock options and warrants, were antidilutive
and therefore were excluded from these calculations.
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.
F - 11
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
$3,445,000, including negative cash flow from operations of approximately
$1,421,000. Cash requirements were covered by sales 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. After the merger, Keys' shareholder held 89%
of the outstanding common stock of the Company. This transaction was
accounted for at historical cost through a reverse acquisition by the
Company. The Company was a shell company with no assets or liabilities.
F - 12
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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>
The following unaudited pro forma data summarizes the results of operations
for the year indicated as if the acquisition of America's Web 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 $ 171,000
Net (loss) $ (2,888,525)
Basic and diluted (loss) per share $ (.19)
Year ended June 30, 1999
Revenues $ 681,822
Net (loss) $ (3,684,295)
Basic and diluted (loss) per share $ (.89)
</TABLE>
F - 13
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 3 - ACQUSITIONS (CONTINUED)
(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.
INVESTMENT IN SUBSIDIARY
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 $2,426,669 and issued a $253,750
note payable.
This investment has been accounted for under the equity method because the
Company retained only temporary control of Prentice. Subsequently, the
Company and Prentice entered into a rescission agreement dated December 29,
1999 (Notes 7 and 15).
Summarized information of Prentice Technologies as of and for the three
months ended 9/30/99 is as follows:
<TABLE>
<S> <C>
Total assets $ 951,002
==============
Total liabilities $ (790,389)
==============
Net loss (3 months ended 9/30/99) $ (3,240)
==============
</TABLE>
F - 14
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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 $ 191,909
Furniture and fixtures 14,696 19,945
---------------- ----------------
75,787 211,854
---------------- ----------------
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 741,264 996,203
Less accumulated depreciation (151,467) (241,531)
---------------- ----------------
$ 589,797 $ 754,672
================ ================
</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 $ -
Accrued payroll costs 43,703 37,003
---------------- ----------------
$ 140,703 $ 37,003
================ ================
</TABLE>
NOTE 6 - 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.
F - 15
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 6 - LEASE OBLIGATIONS (CONTINUED)
The future minimum rental payments due under the lease agreements are as
follows:
<TABLE>
<S> <C>
Year Ending June 30
-------------------
1999 (nine months remaining) $ 309,179
2000 549,360
2001 549,360
----------------
Total $ 1,407,899
================
</TABLE>
NOTE 7 - 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 receipt by the Company of financing aggregating at least $2,000,000.
These loans are personally guaranteed by a shareholder of the Company. These
loans are past due (Note 15).
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 receipt by the Company of financing aggregating at least $2,000,000.
These loans are past due (Note 15).
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 10. The Company also issued warrants for the
purchase of 300,000 shares at an exercise price of $.001. The Company will
amortize approximately $2,000,000 of loan costs using the interest method
over the remaining term of the loans related to these warrants (Note 11).
In connection with the acquisition of Prentice Technologies, the Company
signed a $253,750 note payable, due March 2000 with principal and interest of
$43,284 payable monthly. Interest is calculated at 8% per annum. The Company
entered into a rescission agreement with Prentice in December 1999 which
resulted in the cancellation of 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.
F - 16
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 8 - 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>
<S> <C>
Year Ending June 30,
--------------------
2000 $ 5,662
2001 5,662
2002 2,110
---------------
$ 13,434
===============
</TABLE>
NOTE 9 - PREFERRED STOCK
AGREEMENT WITH MINORITY SHAREHOLDER
As of June 10, 1998, JRHW17 Corporation (owned by a minority shareholder of
Keys) had advanced Keys $1,276,841. On that date, the Company entered into an
agreement with JRHW17 Corporation to cancel this debt. The Company is
obligated to issue 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 offering, 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.
F - 17
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 10 - 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.
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 $641,370 net of $95,625 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 for $387,868 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 have a registration statement declared effective on a timely
basis.
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 the agreement was silent with respect to $2,084,495.
F - 18
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 10 - PRIVATE PLACEMENTS (CONTINUED)
The August and September Private Placements contained repricing warrants
which 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. The number of
repricing warrants to be issued is dependent on a future event and therefore
cannot be valued utilizing the Black-Scholes model until all contingent
factors are known.
NOTE 11 - 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 option
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. The options were valued at approximately $487,000 utilizing the
Black-Scholes pricing model with the following assumptions: expected life 4
years, 0% volatility, risk-free interest rate of 5.5% and a dividend yield of
0%. This expense has been recognized for the year ended June 30, 1998.
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. The options were valued at approximately
$450,000 utilizing the Black-Scholes pricing model with the following
assumptions: expected life 3 years, 0% volatility, risk-free interest rate of
5.5% and a dividend yield of 0%. This expense has been recognized for the
year ended June 30, 1998.
F - 19
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 11 - COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
CONSULTING AGREEMENT (CONTINUED)
In early 1999 two current officers 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 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 by the issuance of warrants
for the purchase of 123,222 shares of common stock of the Company at an
exercise price of $5.275 per share. The fair value of these warrants was
$212,560 based upon the Black-Scholes pricing model with the following
assumptions: expected life five years, 0% volatility, risk free interest rate
of 5.5% and a dividend yield of 0%. This expense has been reflected in the
accompanying financial statements for the year ended June 30, 1999.
EMPLOYMENT AGREEMENT
In August 1999, in conjunction with the acquisition of Prentice, one of its
officers received an option to purchase 350,000 shares of common stock which
were subject to certain performance requirements. No compensation expense was
reflected in the accompanying financial statements due to the uncertainty of
meeting the performance criteria. These options were cancelled in December
1999.
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 stated 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.
F - 20
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 11 - COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
1999 STOCK OPTION PLAN (CONTINUED)
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,
83,868 options 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 common stock on
the date of grant. The fair value of 45,060 of these options is $0 and 38,808
of these options have a fair value of $97,408 utilizing the Black-Scholes
model with the following assumptions: expected life of 5 years, 0%
volatility, risk-free interest rate of 5.5% and a 0% dividend yield. As the
Company has adopted the disclosure only provisions of the Statement of
Financial Accounting Standard No. 123, (SFAS 123) "Accounting for Stock-Based
Compensation," no compensation expense has been recognized related to those
options.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board No. 25, (APB
25) Accounting for Stock Issued to Employees; and complies with the
disclosure requirements of SFAS 123. Under APB 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 for the purchase of 5,584,414 shares
of the company's common stock 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 reflects 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 a subsidiary
which were valued at $7 per share for a total of $193,949. This expense is
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 on the grant date consistent with the method of SFAS 123, the
Company's net income and earnings per share would have been reduced by (1)
either the fair value of grants to employees at greater than fair market
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.
F - 21
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
Net income (loss) and earnings (loss) per share would have been reduced to
the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
June 30, September 30,
-------------------------------- -----------------------------
1998 1999 1998 1999
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net income (loss) - as reported $ (1,655,193) (3,444,520) (213,378) (2,862,974)
Net income (loss) - pro forma $ (1,655,193) (3,444,520) (213,378) (2,925,724)
Earnings (loss) per share - basic and assuming
dilution as reported $ (15.08) (.92) (.05) (.19)
Earnings (loss) per share - pro forma $ (15.08) (.92) (.05) (.19)
</TABLE>
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
Exercise Average
Price of Exercise Price
Options and of Options and
Options Warrants Warrants Options Warrants Warrants
------- -------- -------- ------- -------- --------
<S> <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 9.60 423,222 72,000 3.90
-------------- --------------
Exercised - -
Cancelled (115,090) -
------------- ------------
Outstanding June 30, 1999 5,780,060 195,222 9.52 535,000 195,222 4.17
-------------- --------------
Granted 977,071 280,487 9.59 278,125 2,362 9.69
-------------- --------------
Exercised - -
Cancelled - -
------------- -------------
Outstanding September 30, 1999 6,757,131 475,709 $ 9.50 990,489 74,362 $ 4.64
============= ============= ============= =============
</TABLE>
F - 22
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
Options and Warrants
Options and Warrants Outstanding Exercisable
------------------------------------------------ -----------------------------
Weighted
Average
Weighted remaining Weighted
Number Average Exercise Contractual Number Average Exercise
Outstanding Price Life Exercisable Price
----------- ----- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
Range of Options and Warrants
Exercisable Price
- -----------------------------
June 30, 1999
- -------------
$2.55 - $7.73 1,130,222 $ 4.81 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 1,787,780 4.97 6.30 1,064,851 4.64
$10.00 - $13.53 5,445,060 $ 10.98 4.55 - $ -
</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 - - -
---------------- ---------------
350,090 -
================ ===============
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 202,071 30,000 $ 5.80
Equal to fair value - 250,487 1.40
Greater than fair value 775,000 - .25
---------------- ----------------
977,071 280,487
================ ================
</TABLE>
F - 23
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 12 - 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 13 - 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 14 - 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 the report date, some channels are
under STA (Special Temporary Authority) pending issuance of permanent
licenses.
F - 24
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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, aggregating $1,025,000, 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.
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 upon return of the
equipment, less damage, if any, handling and shipping.
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. Keys 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 and
the landlord has filed a lawsuit to recover costs and rents due over the
remaining term of the lease of approximately $900,000.
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.
F - 25
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
OFFICE SPACE AND TRANSMISSION TOWERS (CONTINUED)
Total annual minimum base rent commitments for the years ended June 30 are as
follows:
<TABLE>
<S> <C>
For The Year Ended June 30,
---------------------------
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>
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.
SERVICES AGREEMENT
In August 1999, the Company entered into a Services Agreement with a
consultant whose services were to begin in October 1999. 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 $1,500,000 utilizing the
Black-Scholes pricing model with the following assumptions: expected life of
6 years, 0% volatility, risk-free interest rate of 5.5% and a 0% dividend
yield. 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
$3,220,000 utilizing the Black-Scholes pricing model with the following
assumptions: expected life of 6 years, 0% volatility, risk-free interest rate
of 5.5% and a 0% dividend yield. This is subject to change as the exercise
price on the options issued in each monthly installment is contingent upon
the market value of the common stock as defined below. No compensation costs
were reflected in the accompanying financial statements, as services were not
performed until October 1999. 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 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.
F - 26
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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 - 27
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 14 - 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 utilizing the Black-Scholes pricing model with the following
assumptions: expected life of three years, 0% volatility, risk free interest
rate of 5.5% and a 0% dividend yield. The expense 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 recognized
approximately $122,000 of compensation expense for the three months ended
September 30, 1999. The value ascribed to the common stock is $7 as the
Company has a history of selling stock for cash at $7 per share.
NOTE 15 - SUBSEQUENT EVENTS
(UNAUDITED)
About September 13, 1999 the Company entered into agreements to acquire what
management believes is approximately a 4.9% equity interest in an entity
which purports to own certain technology. The entity claims the Company is in
default and has terminated two of the three agreements. These agreements
obligate the Company to pay $1.6 million and deliver 500,000 shares of common
stock for this equity interest. The 500,000 shares were delivered in November
1999 and $700,000 (financed with borrowed funds under a convertible
promissory note due April 30, 2000) has been paid. The entity claims the
balance of $300,000 is past due and that $600,000 is due in installments over
the next five months. In consideration of the agreement by the seller to
renegotiate the agreements in good faith, Telecom Wireless delivered to the
seller an additional 452,381 shares of common stock in December 1999. The
agreements to be renegotiated include a worldwide, non-exclusive, five-year
license agreement which the entity purports to have cancelled.
In October 1999, the majority stockholder of the Company sold an option to
purchase 250,000 shares of the Company's common stock for $250,000 and lent
the proceeds to the Company. The term of the option is two years and the
option exercise price is $.10 per share. The fair value of this option is
approximately $1,700,000 utilizing the Black-Scholes pricing model with the
following assumptions: expected life of 2 years, 0% volatility, risk-free
rate of 5.5% and a 0% dividend yield. Compensation expense will be recognized
in October 1999 for this option. The Company issued 250,000 shares of its
common stock in January 2000 to the option holder in payment of the loan and
termination of this option.
In November 1999, the Company authorized the issuance of warrants for the
purchase of 300,000 shares of its common stock as partial consideration for
consulting services rendered by a financial consultant. In November 1999, the
consultant indicated its desire to exercise the warrants. In January 2000,
the Company issued the shares underlying the warrants to three individuals
identified by the holder of the warrant.
Effective December 29, 1999, the Company entered into a rescission agreement
with Prentice. The Company returned its 90% ownership in Prentice and
received the 346,667 shares of its common stock that were originally issued.
The note payable to Prentice in the amount of $253,750 was cancelled. No
payments had been made on the note since its issuance in September 1999.
Options for the purchase of 550,000 shares of common stock and 100,000 shares
of common stock issued to the sole shareholder of Prentice were cancelled.
The Company owes Prentice approximately $57,000 relating to operating costs
incurred while the Company subleased office space from Prentice. If the
Company pays this debt in full, with interest at 12%, by February 1, 2000,
the Company will receive an approximate 1% interest in Prentice.
F - 28
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
UNAUDITED (CONTINUED)
In December 1999, the Company entered into an agreement with a vendor to
purchase broadband wireless telecommunications equipment and services to
establish wireless communications networks in north america. The agreement
requires expenditures over its five-year term of approximately $225,000,000
by the Company. The Company is obligated to purchase $13,635,375 of equipment
during the first year of the contract. Upon satisfaction of a trial test of
the system, the Company must pay $3,450,090, with additional payments of
$3,392,290 each due on June 1, 2000, September 1, 2000 and December 1, 2000.
The Company must pay the vendor five percent of the purchase price of any
equipment that it was obligated but failed to purchase by the end of each
calendar year upon termination of the agreement by either party.
In December 1999, the Company issued a promissory note in the principal
amount of $140,000. The Company is obligated to issue up to 50,000 shares of
its common stock pursuant to the terms of the promissory note.
In December 1999, the Company entered into an agreement with an individual to
issue 100,000 shares of the Company's common stock at a purchase price of
$2.50 per share and warrants for the purchase of an additional 100,000 shares
of common stock at an exercise price of $2.50 per share. The warrants will be
exercisable at any time within three years from the date of the contract.
F - 29
<PAGE>
TELECOM WIRELESS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
UNAUDITED (CONTINUED)
In December 1999, the Company entered into a one-year investment banking
agreement with an institution. Under the agreement, the investment banker
is to perform a variety of services including advice and counsel
regarding strategic business and financial plans, negotiations with potential
investors, acquisition candidates, strategic partners and other such
services. The agreement requires a non-refundable fee of $500,000 or 550,000
shares of the Company's common stock and a three-year warrant for the
purchase of an additional 1,000,000 shares exercisable at $5.50 per share.
The Company issued the 550,000 shares in January 2000. If the 550,000 shares
are not free-trading by March 21, 2000, the Company is obligated to issue an
additional 200,000 shares of common stock as a penalty. The Company also
agreed to pay finder's fees with respect to transactions introduced to the
Company by the investment banker. The investment banking company may assess
finder's fees to the Company for a two and a half-year period subsequent to
the term of this agreement.
In January 2000, the Company issued 2,300 shares of its common stock to 23
non-officer employees of the Company and its two subsidiaries as a stock
bonus pursuant to an exemption from securities registration provided by Rule
701 under the Securities Act.
In January 2000, the Company issued 1,476,000 shares of its common stock and
warrants for the purchase of a net of 1,100,000 shares of its common stock in
consideration of $690,000 in cash, $625,000 in debt cancellation and
investment banking services to be rendered. Substantially all of the shares
have registration rights.
The 1,000,000 in bridge financing that was due in October and November 1999
is past due with the exception of $375,000 which has been converted to common
stock in January 2000. Demand for payment or conversion on the remaining
balance has not been made.
F - 30
<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 - 31
<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 - 32
<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 - 33
<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 - 34
<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 - 35
<PAGE>
SYS GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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.
See notes to financial statements.
F - 36
<PAGE>
SYS GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 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.
See notes to financial statements.
F - 37
<PAGE>
SYS GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)
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.
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 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
---------------- ----------------
<S> <C> <C>
(Unaudited)
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>
See notes to financial statements.
F - 38
<PAGE>
SYS GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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 majority Stockholder. At December
31, 1998 and June 30, 1999, $69,936 and $63,055 respectively, was borrowed
against the line.
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>
<S> <C>
YEAR ENDING DECEMBER 31,
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.
See notes to financial statements.
F - 39
<PAGE>
SYS GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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.
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>
<S> <C>
YEAR ENDING DECEMBER 31,
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.
See notes to financial statements.
F - 40
<PAGE>
SYS GROUP, INC. D/B/A PRENTICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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.
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.
See notes to financial statements.
F - 41
<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 - 42
<PAGE>
AMERICA'S WEB STATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------- June 30,
1998 1997 1999
---------------- ---------------- ----------------
ASSETS (Unaudited)
<S> <C> <C> <C>
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 accountant's reports.
F - 43
<PAGE>
AMERICA'S WEB STATION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 19, 1997
Year Ended (Inception) Six Months Ended
-------------- through June 30,
December 31, December 31, ---------------------------------
1998 1997 1999 1998
-------------- -------------- -------------- --------------
(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 accountant's reports.
F - 44
<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 accountant's reports.
F - 45
<PAGE>
AMERICA'S WEB STATION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
January 29, 1997
(Inception) Six Months Ended
Year Ended through June 30,
December 31, December 31, ----------------------------------
1998 1997 1999 1998
--------------- --------------- --------------- ---------------
<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 accountant's reports.
F - 46
<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.
F - 47
<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.
F - 48
<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>
<S> <C>
Twelve Months Ending June 30,
------------------------------
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%.
F - 49
<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>
<S> <C>
Twelve Months Ending June 30,
-----------------------------
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.
F - 50
<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.
F - 51
<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 give effect to the business combination of Telecom Wireless
Corporation and America's Web Station, Inc., as if it occurred effective July 1,
1998.
These financial statements include the related pro forma adjustments described
in the notes thereto. The transactions between Telecom Wireless Corporation and
America's Web Station, Inc. 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 - 52
<PAGE>
TELECOM WIRELESS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Telecom Pro Forma Adjustments Pro Forma
Wireless America's Web ----------------------------- Consolidated
Corp. Station, Inc. Total Debit Credit Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Internet services $ - $ 159,168 $ 159,168 $ - $ - $ 159,168
Wireless cable revenues 517,261 - 517,261 - - 517,261
Consulting fees 5,393 - 5,393 - - 5,393
------------- ------------- ------------- ------------- ------------- -------------
522,654 159,168 681,822 - - 681,822
------------- ------------- ------------- ------------- ------------- -------------
Expenses
Direct expenses 275,705 - 275,705 - - 275,705
Internet service operating costs - 57,090 57,090 57,090
Stock based compensation 1,547,560 - 1,547,560 - - 1,547,560
Selling, general and administrative 2,051,568 232,182 2,283,750 (1) 102,206 - 2,385,956
------------- ------------- ------------- ------------- ------------- -------------
Total cost of sales and expenses 3,874,833 289,272 4,164,105 102,206 - 4,266,311
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) from operations (3,352,179) (130,104) (3,482,283) (102,206) - (3,584,489)
Other income (expenses)
Interest income - - - - -
Interest expense (92,341) (7,465) (99,806) - - (99,806)
------------- ------------- ------------- ------------- ------------- -------------
Total other income (expense) (92,341) (7,465) (99,806) - - (99,806)
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
minority interest (3,444,520) (137,569) (3,582,089) (102,206) - (3,684,295)
Income tax expense (benefit) - - - - - -
------------- ------------- ------------- ------------- ------------- ------------
Income (loss) before minority interest (3,444,520) (137,569) (3,582,089) (102,206) (3,684,295)
Minority interest - - - - - -
------------- ------------- ------------- ------------- ------------- ------------
Net income (loss) (3,444,520) (137,569) (3,582,089) (102,206) (3,684,295)
Dividends on preferred stock - - - - - -
------------- ------------- ------------- ------------- ------------- ------------
Net income (loss) available to common
stockholders (3,444,520) $ (137,569) $ (3,582,089) $ (102,206) $ - $ (3,684,295)
============= ============= ============= ============= ============= ============
Earnings (loss) per common share -
basic and diluted $ (.92) $ (.97)
============ ============
Weighted average shares outstanding -
basic and diluted 3,759,050 3,787,612
============ ============
</TABLE>
F - 53
<PAGE>
TELECOM WIRELESS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Telecom Pro Forma Pro Forma
Wireless America's Web Acquisition Consolidated
Corp. Station, Inc. Total Adjustments Total
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (3,444,520) $ (137,569) $ (3,582,089) $ (102,206) $ (3,684,295)
------------ ------------- ------------- ------------- -------------
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 255,978 19,638 275,616 102,206 377,822
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) 10,683 - 10,683
Other assets (3,880) (2,310) (6,190) - (6,190)
Accounts payable (14,510) 8,043 (6,467) - (6,467)
Accrued expenses 104,445 - 104,445 - 104,445
Other liabilities - - - - -
------------ ------------- ------------- ------------- -------------
2,023,065 23,809 2,046,874 102,206 2,149,080
------------ ------------- ------------- ------------- -------------
Net cash used by operating activities (1,421,455) (113,760) (1,535,215) - (1,535,215)
------------ ------------- ------------- ------------- -------------
Cash flows from investing activities
Acquisition of equipment (121,117) (8,627) (129,744) - (129,744)
Net change in other assets - - - - -
------------ ------------- ------------- ------------- -------------
Net cash used by investing activities (121,117) (8,627) (129,744) - (129,744)
------------ ------------- ------------- ------------- -------------
Cash flows from financing activities
Net activity on line-of-credit/floor plans - - - - -
Net repayments to related party (16,667) (30,822) (47,489) - (47,489)
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 - - - - -
Dividends/distributions paid - - - - -
------------ ------------- ------------- ------------- -------------
Net cash provided by financing activities 2,162,638 113,507 2,276,145 - 2,276,145
------------ ------------- ------------- ------------- -------------
Net increase (decrease) in cash 620,066 (8,880) 611,186 - 611,186
Cash at beginning of period 600 14,758 15,358 - 15,358
------------ ------------- ------------- ------------- -------------
Cash at end of period $ 620,666 $ 5,878 $ 626,544 $ - $ 626,544
============ ============= ============= ============= =============
</TABLE>
F - 54
<PAGE>
TELECOM WIRELESS CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
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>
(1) To record amortization of goodwill and subscriber lists.
F - 55
<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
3.6** Articles of Amendment to Articles of Incorporation setting forth
the Amended and Restated Preferences, Limitations, and Relative
Rights of Redeemable, Non-voting, Cumulative Preferred Stock,
Series 1998-1 as filed with the Utah Secretary of State on January
19, 2000
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
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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.
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
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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
10.31** Form of Stock Sale Restriction Agreement by and between Telecom
Wireless and certain of its present or former officers and/or
directors
10.32** Letter Agreement dated December 6, 1999, regarding investment by
Matthew L. Talbert
10.33** Investment Banking Agreement dated December 9, 1999, by and
between Telecom Wireless Corporation and Hampton-Porter Investment
Bankers
10.34** Office Lease Agreement dated December 21, 1999 between Prentice
Point Limited Partnership and Telecom Wireless Corporation
together with letter agreement dated December 21, 1999, setting
forth additional understandings and agreements in connection with
the Office Lease Agreement
10.35** Settlement Agreement dated December 22, 1999, regarding bridge
loans between Commtel Services Ltd. and Telecom Wireless
Corporation
10.36** Purchase Agreement dated December 22, 1999, between Adaptive
Broadband Corporation and Telecom Wireless Corporation
10.37** Promissory Note dated December 23, 1999, in the original principal
amount of $140,000 payable to Leonard Gorelick
10.38** Subscription Agreement for the acquisition by Telecom Wireless of
250 shares of Series C Common Stock of HyperLight Network
Corporation
10.39** Assignment and Subscription Agreement for the acquisition by
Telecom Wireless of a 2% of 100% of the liquidating distribution
of VisionTek, L.P.
10.40** Interim Funding Agreement dated September 13, 1999, between
HyperLight Network Corporation and Telecom Wireless
10.41** Technology Marketing and License Agreement dated September 13,
1999, between HyperLight Network Corporation and Telecom Wireless
16.1** Letter dated January 28, 2000, from Gerstle, Rosen & Associates,
P.A. regarding change in certifying accountants
21.1** List of Subsidiaries of Telecom Wireless
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* 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.
** Incorporated by reference to the same numbered exhibit in Registrant's
Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2
dated February 1, 2000, SEC File No. 333-91717.
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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: February 9, 2000 By: /s/ Calvin D. Smiley
--------------------------------
Name: Calvin D. Smiley
Title: Chief Executive Officer
and President
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