AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON October 27, 2000
REGISTRATION NO. 333-93733
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
Third Enterprise Service Group, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
--------------------------------------------- ---------------------------- ------------------------------
Florida 6770 59-3651763
--------------------------------------------- ---------------------------- ------------------------------
<S> <C> <C>
State or other jurisdiction of PRIMARY STANDARD INDUSTRIAL I.R.S. Employer Identification No.
incorporation or organization CLASSIFICATION CODE NUMBER
-------------------------------------------- ----------------------------------------- ------------------------------------------
</TABLE>
2503 W. Gardner Ct.,
Tampa, FL 33611
813. 831-9348
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Michael T. Williams
2503 W. Gardner Ct.
Tampa, FL 33611
TELEPHONE: 813.831.9348
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
promptly as practicable after this registration statement becomes effective and
after the closing of the merger of the proposed merger described in this
registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b, under the securities act, check the following box and
list the securities act registration statement number of the earlier effective
registration statement for the same offering. *[ ] *registration number,
1
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the securities act, check the following box and list the securities act
registration statement number of the earlier effective registration statement
for the same offering. *[ ]
*registration number,
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. *[ ]
------------------------
CALCULATION OF REGISTRATION FEE
Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to be offering price aggregate registration
to be registered per unit offering price fee
registered
Common 6,032,061 N/A $0 (2) $100 (2)
Stock, par
Value - no
(1) Represents an estimate of the maximum number of shares of common stock of
Registrant which may be issued to former holders of shares of common stock of
Competitive Companies pursuant to the merger described herein. (2) The
registration fee has been calculated pursuant to Rule 457(f )(2). As of the
filing of this registration statement, Competitive Companies had an accumulated
capital deficit. In addition, Competitive Companies' common stock has no par
value. Accordingly, the proposed maximum offering price has been calculated by
multiplying one-third,1/3, of an assumed par value for Competitive Companies'
Common Stock of, *par per share, pursuant to Nevada law by the maximum number of
shares to be issued to the holders of Competitive Companies common stock in the
merger.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS
Third Enterprise Service Group, Inc.
Third Enterprise Service Group, Inc., a Florida corporation and Competitive
Companies, Inc., a Nevada corporation, have entered into a merger agreement. As
a result of the merger, each outstanding share of Competitive Companies common
stock, other than dissenting shares, as discussed later in this document, will
be exchanged for one share of Third Enterprise Service Group common stock. When
the merger closes, Third Enterprise Service Group will change its name to
Competitive Companies and will be the surviving corporation. It will then file
to have its stock quoted on the OTC Bulletin Board.
Third Enterprise Service Group has also entered into an asset purchase agreement
with Huntington Telecommunications Partners, LP, a California limited
partnership. The purchase price for the assets, which consist of the equipment
used in the operation of, and in connection with telephone and cable television
systems, and services; and right of entry for four apartment complexes
consisting of 1,171 telephone passings and 614 cable passings, is 1,000,000
shares of Third Enterprise Service Group common stock, subject to increase if
some events occur. The asset purchase and the merger will close simultaneously.
The following table contains comparative share information for shareholders of
Competitive Companies, partners in Huntington Partners and shareholders in Third
Enterprise Service Group immediately after the closing of the merger.
<TABLE>
<CAPTION>
The former shareholders of The former partners of The current shareholders Total
Competitive Companies* Huntington of Third Enterprise
Service Group
----------------- ---------------------------- ----------------------- ---------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Number 4,907,061 1,000,000 125,000 6,032,061
----------------- ---------------------------- ----------------------- ---------------------------- -----------------
Percentage 81.3% 16.6% 2.1% 100%
----------------- ---------------------------- ----------------------- ---------------------------- -----------------
</TABLE>
*This assumes no shares of Class A preferred stock or Class B preferred stock
are converted. If they were, there would be an aggregate of an additional
20,000,000 shares of common stock upon conversion of the Class A shares and an
unknown number, if any, additional shares to be issued upon conversion of Class
B shares. Also assumes no stock options that have not been exercised, but are
currently exercisable, are converted. If they were, there would be an aggregate
of an additional 2,043,000.
The merger presents some risks. We suggest you review "Risk Factors" beginning
on page ___.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved or disapproved the Third Enterprise Service Group
common stock to be issued in the merger or if this information statement for
shareholders of Competitive Companies /prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus is ___, 2000.
3
<PAGE>
SUMMARY
This summary provides a brief overview of the key aspects of this offering.
The merger agreement with Competitive Companies is filed as an exhibit to this
registration statement.
The Companies
Third Enterprise Service Group, Inc.
2503 W. Gardner Ct.
Tampa, FL 33611
Telephone: 813/831-9348
Third Enterprise Service Group was organized as a corporation under the laws of
the state of Florida in April, 1999. Since inception, our primary activity has
been directed to organizational efforts. It was formed as a vehicle to acquire
through a registered securities offering a private company desiring to become an
SEC reporting company in order thereafter to secure a listing on the over the
counter bulletin board. Third Enterprise Service Group has now identified
Competitive Companies as the entity Third Enterprise Service Group wishes to
acquire. Third Enterprise Service Group is not searching for additional
acquisition candidates.
It has never offered or sold any securities in either a registered or
unregistered transaction except for issuing shares to its 13 stockholders upon
its formation.
Third Enterprise Service Group is not currently a company which is listed for
trading on the OTC Bulletin Board. Before securing approval of an application to
be listed on the OTC Bulletin Board, Third Enterprise Service Group must first
have this registration statement declared effective. Public Securities, an NASD
Market Maker, has agreed to file a form 211 to secure a listing on the OTC
Bulletin Board. Third Enterprise Service Group believes that the NASD will not
approve this application until this registration statement has been declared
effective. After this task has been accomplished, the NASD and the Market Maker
must resolve all outstanding issues that the NASD may have in order for trading
to commence.
Competitive Companies, Inc.
3751 Merced Drive, Suite A
Riverside, CA 92503
Telephone: 909.687.6100
Competitive Companies was incorporated under the laws of the state of Nevada in
March 1998. Competitive Companies has two wholly owned subsidiaries: Competitive
Communications, Inc. that was incorporated under the laws of the state of
California in February 1996 and is the successor to Western Telephone &
Television, which was founded as a sole proprietorship in 1985; and CCI
Residential Services, Inc. that was incorporated under the laws of the state of
California in January 2000.
Under shared tenant services provisions, Competitive Companies provides local
and long distance/interexchange telephone, cable television, a PC lease-to-own
program, and public telephone service to multi-tenant residential buildings. As
a competitive local exchange carrier and long distance carrier, Competitive
Companies provides local and long distance/interexchange telephone services, and
a PC lease-to-own program to residential and business customers. Competitive
4
<PAGE>
Companies owns and operates websites on the Internet and provides Internet
service as a private label Internet service provider to both multi-tenant
residential buildings and residential and business customers. Competitive
Companies and its subsidiaries operations are co-located in Riverside,
California, and approximately 80% of its customers are located in California.
Huntington Partners
Third Enterprise Service Group has also entered into an asset purchase agreement
with Huntington Telecommunications Partners, LP, a California limited
partnership.
Huntington Telecommunications Partners, LP, is a California limited partnership
organized in February 1994 for the purpose of owning, operating and managing
private telecommunications systems to provide local and long distance telephone
services and features to tenants in four multi-family apartment properties and
cable television services to tenants in two multi-family apartment properties.
The asset purchase and the merger will close simultaneously. A copy of the asset
purchase agreement is filed as an exhibit to this registration statement.
Comparison of the percentage of outstanding shares entitled to vote held by
directors, executive officers and their affiliates and the vote required for
approval of the merger
More than 80% of Third Enterprise Service Group's shares are held by its
directors, executive officers and their affiliates. A majority vote of the
issued and outstanding shares is required to approve the merger. Shareholders
owning more than 80% of Third Enterprise Service Group's common stock have
executed a written consent voting to approve the merger. No further consent or
any of the shareholders of Third Enterprise Service Group is necessary to
approve the merger under the laws of the state of Nevada.
Approximately 60% of Competitive Companies' voting common stock and 100% of
Class A preferred shares are held by its directors, executive officers and their
affiliates. A majority vote of the issued and outstanding shares is required to
approve the merger. Assuming consents are secured from shareholders owning more
than 50% of each of these classes of the stock of Competitive Companies,
shareholders who did not consent to the merger will, by otherwise complying with
Nevada corporate law, be entitled to dissenters' rights with respect to the
proposed merger. No consents will be solicited or accepted until after the
effective date of this information statement for shareholders of Competitive
Companies/prospectus. Based upon the ownership of more than 50 % of Competitive
Companies common and Class A preferred stock by officers, directors and
affiliates, it appears that a favorable vote is assured.
Regulatory approval required
Neither Third Enterprise Service Group nor Competitive Companies is aware of any
governmental regulatory approvals required to be obtained with respect to the
closing of the merger, except for the filing of the articles of merger with the
offices of the secretary of state of the state of Nevada.
Dissenters' rights
Dissenters' rights of appraisal exist. In general, under Nevada law, any
shareholder who does not give consent for the merger and files a written demand
for appraisal with Competitive Companies within 10 days of the closing of the
merger will be paid the fair market value of the shares on the date of the
closing of the merger, as determined by the board of directors of Competitive
Companies. If you wish to exercise these rights, you must not consent in writing
or otherwise vote in favor of the merger, must file a written demand within the
prescribed time period, and follow other procedures. These rights the way you
exercise them are discussed in greater detail beginning on page __.
5
<PAGE>
Federal income tax consequences
Tax matters are very complicated and the tax consequences of the merger to you
will depend on the facts of your own situation. You should consult your tax
advisors for a full understanding of the tax consequences of the merger to you.
Neither Competitive Companies nor its holders of its common stock should
recognize gain or loss for federal income tax purposes as a result of the
merger.
Other Information for Competitive Companies Stockholders:
o Do not send in your Competitive Companies stock certificates now. If the
merger is completed, we will send you written instructions for
exchanging your shares.
o The merger has been structured as a tax-free reorganization. The tax
basis in your Competitive Companies common stock will carryover and
become the tax basis in your new shares of Third Enterprise Service
Group common stock.
o Like Competitive Companies, Third Enterprise Service Group has never
paid any dividends.
o If you have any questions about the merger, please call
Larry Halstead
Competitive Companies, Inc.
3751 Merced Drive, Suite A
Riverside, CA 92503
Telephone: 909.687.6100
Selected Historical Financial Information
The following selected historical financial information of Competitive
Companies, Huntington Telecommunications Partners, L.P. and Third Enterprise
Service Group has been derived from their respective historical financial
statements, and should be read in conjunction with the financial statements and
the notes thereto, which are included in this prospectus.
Competitive Companies SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30 December 31
2000 1999
---------------- ---------------
<S> <C> <C>
Income Statement Data:
Revenues $ 793,880 $ 1,452,489
Operating Expenses 831,285 17,102,037
Loss from Operations (37,405) (15,649,548)
Other Income (loss) (35,171) (77,343)
Loss before taxes (72,576) (15,726,891)
Income tax expense 0 0
Net loss (72,576) (15,726,891)
6
<PAGE>
Common Share Data:
Net loss per share (0.02) (3.82)
Book value $ 0.10 $ 0.11
Weighted average common shares
Outstanding 4,852,061 4,118,000
Period end shares outstanding 4,852,061 4,852,061
Balance Sheet Data:
Total assets $ 1,125,788 $ 1,296,867
Working Capital 284,265 339,764
Shareholders' Equity $ 497,829 $ 512,905
</TABLE>
Huntington Telecommunications SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30 December 31
2000 1999
---------------- ---------------
<S> <C> <C>
Income Statement Data:
Revenues $ 349,262 $ 715,063
Operating Expenses 443,500 755,243
Loss from Operations (94,238) (40,180)
Other Income (loss) 0 0
Loss before taxes (94,238) (40,180)
Income tax expense 0 0
Net loss (94,238) (40,180)
Common Share Data:
Net loss per share* (0.09) (0.04)
Book value* $ 0.18 $ 0.28
Weighted average common shares
Outstanding* 1,000,000 1,000,000
Period end shares outstanding * 1,000,000 1,000,000
Balance Sheet Data:
Total assets $ 248,354 $ 332,532
Working Capital 51,578 99,146
Shareholders' Equity $ 248,354 $ 277,509
</TABLE>
* Assumes that 1,000,000 shares are outstanding as if the merger occurred.
Third Enterprise Service Group SELECTED HISTORICAL FINANCIAL INFORMATION
The following information concerning our financial position and operations is as
of and for the period inception through June 30, 1999.
Total assets $ 0
Total liabilities 0
Equity 0
Sales 0
Net loss 6,079
Net loss per share 0.00
7
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF Competitive Companies AND
Huntington Telecommunications Partners, L.P.
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma combined condensed financial statements
include the historical and pro forma effects of the August 7, 1998 acquisition
of Huntington Partners. These pro forma financial statements also include (i)
the historical and pro forma effects of the issuance of 1 million shares of
common stock ($3 million).
The following unaudited pro forma combined condensed financial statements have
been prepared by the management of Competitive Companies from its historical
consolidated financial statements and the historical financial statements of
Huntington Partners which are included in this form s-4. The unaudited pro forma
combined Condensed statements of operations reflect adjustments as if the
transactions had occurred on January 1, 1999. The unaudited pro forma combined
condensed balance sheet reflects adjustments as if the transactions had occurred
on June 30, 2000. See "Note 1 - Basis of Presentation." The pro forma
adjustments described in the accompanying notes are based upon preliminary
estimates and certain assumptions that management believes are reasonable in the
circumstances.
The unaudited pro forma combined condensed financial statements are not
necessarily indicative of what the financial position or results of operations
actually would have been if the transaction had occurred on the applicable dates
indicated. Moreover, they are not intended to be indicative of future results of
operations or financial position. The unaudited pro forma combined condensed
financial statements should be read in conjunction with the historical
consolidated financial statements of the Competitive Companies and Huntington
Partners and related notes thereto which are included in this form s-4.
8
<PAGE>
Proforma Combined Balance Sheet
June 30, 2000
<TABLE>
<CAPTION>
Huntington
ASSETS Competitive Telecommunications Adjustmentst Totals
------ Companies, Inc. Partners, LP
-------------- ---------------- --------------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 299,604 $ 60,236 $ - $ 359,840
Receivables:
Accounts, net of allowance for doubtful accounts
of $227,914 171,489 56,425 227,914
Inventories 34,454 - 34,454
Prepaid expenses and other current ass10,577 - 10,577
-------------- ---------------- --------------- ---------
Total current assets 516,124 116,661 - 632,785
-------------- ---------------- --------------- ---------
PROPERTY AND EQUIPMENT - NET 580,694 131,693 712,387
OTHER ASSETS 28,970 - B 2,818,729 2,847,699
-------------- ---------------- --------------- ---------
TOTAL $ 1,125,788 $ 248,354 $ 2,818,729 $4,192,871
============== ================ =============== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,001 $ 65,083 $ - $ 94,084
Advances from stockholders 48,717 - 48,717
Current maturities of long-term debt 64,000 - 64,000
Current maturities of capital lease 72,000 - 72,000
Accrued and other liabilities 18,141 - 18,141
-------------- ---------------- --------------- ---------
Total current liabilities 231,859 65,083 - 296,942
LONG-TERM DEBT (net of current
maturities) 296,100 - 296,100
CAPITAL LEASE OBLIGATIONS (netof
current maturites) 100,000 - 100,000
-------------- ---------------- --------------- ---------
Total liabilities 627,959 65,083 - 693,042
-------------- ---------------- --------------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A convertible preferred stock 4,000 - 4,000
Class A common stock 4,852 - A 1,000 5,852
Additional paid-in capital 16,642,221 183,271 A2,817,729 19,643,221
Deficit (16,153,244) - (16,153,244)
Subscriptions receivable - - -
-------------- ---------------- --------------- ---------
Total stockholders' equity 497,829 183,271 2,818,729 3,499,829
-------------- ---------------- --------------- ---------
TOTAL $ 1,125,788 $ 248,354 $ 2,818,729 $ 4,192,871
============== ================ =============== =========
</TABLE>
9
<PAGE>
Proforma Combined Income Statement
For the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Huntington
Competitive Telecommunications Adjustmentst Totals
Companies, Inc. Partners, LP
-------------- ---------------- --------------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 793,880 $ 349,262 D $(161,000) $ 982,142
COSTS OF REVENUES 525,574 308,140 D (161,000) 672,714
----------- ---------------- ---------- ------------
GROSS PROFIT 268,306 41,122 - 309,428
----------- ---------------- ---------- ------------
OTHER OPERATING EXPENSES:
Occupancy and equipment 59,219 49,006 108,225
Employee compensation 98,129 98,129
Provision for bad debts 38,228 4,000 42,228
Professional fees 49,868 49,868
General and Administrative 60,267 82,354 142,621
Amortization - - C 140,836 140,836
----------- ---------------- ---------- ------------
Total other operating expen305,711 135,360 140,836 581,907
----------- ---------------- ---------- ------------
LOSS FROM OPERATIONS (37,405) (94,238) (140,836) (272,479)
----------- ---------------- ---------- ------------
OTHER INCOME (EXPENSE):
Other income 1,280 - 1,280
Interest expense (36,451) - (36,451)
----------- ---------------- ---------- ------------
Total other expense-net (35,171) - - (35,171)
----------- ---------------- ---------- ------------
NET LOSS $ (72,576) $ (94,238) $ (140,836) $ (307,650)
=========== ================ ========== ============
NET LOSS PER SHARE
Basic and diluted $ (0.02) $ (0.05)
=========== ============
Weighted average number of
shares - basic and diluted 4,852,061 5,852,061
=========== ============
</TABLE>
10
<PAGE>
Proforma Combined Income Statement
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Huntington
Competitive Telecommunications Adjustmentst Totals
Companies, Inc. Partners, LP
-------------- ---------------- --------------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 1,452,489 $ 715,063 D $ (350,000) $ 1,817,552
COSTS OF REVENUES 1,095,455 515,216 D (350,000) 1,260,671
------------ --------------- ----------- -----------
GROSS PROFIT 357,034 199,847 - 556,881
------------ --------------- ----------- -----------
OTHER OPERATING EXPENSES:
Stock based compensation 15,443,277 - - 15,443,277
Occupancy and equipment 117,584 99,907 - 217,491
Employee compensation 145,974 - - 145,974
Provision for bad debts 23,282 14,520 - 37,802
Professional fees 66,501 - - 66,501
General and Administrative 209,964 125,600 - 335,564
Amortization - - C 281,673 281,673
------------ --------------- ----------- -----------
Total other operating
expenses 16,006,582 240,027 281,673 16,528,282
------------ --------------- ----------- -----------
LOSS FROM OPERATIONS (15,649,548) (40,180) (281,673) (15,971,401)
------------ --------------- ----------- -----------
OTHER INCOME (EXPENSE):
Other income - - - -
Interest expense 77,343 - - 77,343
------------ --------------- ----------- -----------
Total other expense-net 77,343 - - 77,343
------------ --------------- ----------- -----------
NET LOSS $ (15,726,891) $ (40,180) $(281,673.00)$(16,048,744)
============ =============== =========== ===========
NET LOSS PER SHARE
Basic and diluted $ (3.82) $ (3.14)
============ ===========
Weighted average number of
shares - basic and diluted 4,118,000 5,118,000
============ ===========
</TABLE>
11
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma combined condensed statements of
operations present the historical results of operations of the Competitive
Companies and Huntington Partners for the six months ended June 30, 2000 and for
the year ended December 31, 1999 with pro forma adjustments as if the
transaction had taken place on January 1, 1999. The unaudited pro forma combined
condensed statement of operations for the year ended December 31, 1999, is
presented using the combined historical results for the year then ended. The
unaudited pro forma combined condensed statement of operations for the six month
period ended June 30, 2000, is presented using the combined historical results
for the six months ended June 30, 2000. The unaudited pro forma combined
condensed balance sheet presents the historical balance sheets of as of June 30,
2000, with pro forma adjustments as if the transaction had been consummated as
of June 30, 2000 in a transaction accounted for as a purchase in accordance with
generally accepted accounting principles.
Certain reclassifications have been made to the historical financial
Statements to conform to the pro forma combined condensed financial statement
presentation.
2. PRO FORMA ADJUSTMENTS
The following adjustments give pro forma effect to the transaction:
(a) To record purchase price consideration of 1 million shares ($3
million).
(b) To record the cost in excess of net assets acquired of approximately
$2.8 million.
(c) To record amortization of the cost in excess of acquired net assets
over an estimate life of 10 years. Such amortization expense is
subject to possible adjustment resulting from the completion of
valuation analysis and final post-closing adjustments.
(d) To eliminate inter-company transactions.
12
<PAGE>
Competitive Companies COMPARATIVE PER SHARE DATA
June 30, 2000
------------------
Numerator - basic and diluted
LOSS per share
Net loss before merger $ (72,576)
==================
Proforma Net loss after merger $ (166,814 )
==================
Denominator - Basic LOSS per share
Common stock outstanding before merger 4,907,061
==================
Common stock outstanding after merger 6,032,061
==================
Basic and diluted loss per share before
Merger* $ (0.02)
==================
Basic and diluted loss per share
after merger* $ (0.03)
==================
* Convertible notes, convertible preferred stock, options and warrants are
considered anti-dilutive and not included in the above calculations
13
<PAGE>
RISK FACTORS
RISKS CONCERNING COMPETITIVE COMPANIES.
Because Competitive Companies has experienced losses, including a loss of
$15,726,891 for the year ended December 31, 1999 and expects its expenses to
increase, Competitive Companies may not be able to achieve profitability. This
is particularly true due to current litigation.
Since its inception, Competitive Companies has incurred losses. As of December
31, 1999 Competitive Companies had an accumulated deficit of $16,080,668.
Competitive Companies expects to continue to incur losses until Competitive
Companies is able to significantly increase revenues from sales of its
telecommunications products and services. Its operating expenses are expected to
continue to increase significantly in connection with its proposed expanded
activities, especially in the areas of telecommunication services for
multi-dwelling unit complexes since they require significant initial investment
in on-site switching equipment. To a large extent these expenses are fixed.
Competitive Companies cannot be certain that it will be able to accurately
predict its revenues, particularly in light of the general uncertainty and
intense competition for the sale of telecommunications products and services and
its limited operating history. Accordingly, its future profitability will depend
on its ability to increase its revenues while controlling costs.
Competitive Companies' subsidiary is a defendant in Personal Communications
Spectrum V vs. Competitive Communications, Inc., American Arbitration
Association Case No 72 Y 181 1033 99. A federal receiver has been appointed for
Personal Communications. The receiver is seeking payment of fees claimed due
from Competitive Communications. Any adverse decision would cause Competitive
Companies substantial financial harm, seriously damaging its business and
operations as a going concern.
Competitive Companies relies on contracts with third-parties to provide services
for resale. Changes in these contracts could reduce Competitive Companies'
revenues.
Competitive Companies' ability to obtain cable television, telephone or Internet
service for resale may be harmed by a number of factors, including the
following:
o Third-parties may increase the price of the television, telephone or
Internet service they provide.
o Many third-party telephone or Internet service providers may compete with
it for customers and may decide not to provide it with discounted prices
for the telephone and Internet services.
o Competitive Companies anticipate that its contracts with third-party
providers will be usually short-term and may be canceled if Competitive
Companies does not fulfill its obligations.
o Competitive Companies' competitors and many third-party local and long
distance telephone and Internet service providers may provide
telecommunications products and services that are similar or the same as
its telecommunications products and services and may do so at a lower cost.
Competitive Companies' management has significant control over stockholder
matters, which may impact the ability of minority stockholders to influence its
activities.
Competitive Companies' officers and directors and their affiliates control the
outcome of all matters submitted to a vote of the holders of common stock,
including the election of directors, amendments to its certificate of
incorporation and approval of significant corporate transactions. These persons
will beneficially own, in the aggregate, approximately 60% of its outstanding
common stock. This consolidation of voting power could also have the effect of
delaying, deterring or preventing a change in control of Competitive Companies
that might be beneficial to other stockholders.
14
<PAGE>
If Competitive Companies does not effectively manage rapid expansion of its
business, its revenues will be reduced.
If Competitive Companies is successful in the implementation of its business
plan, it will be rapidly expanding its operations and providing bundled
telecommunications services on a widespread basis. This rapid expansion may
place a significant strain on its management, financial and other resources.
Under certain circumstances Competitive Companies may need additional capital to
expand its business and increase revenue.
Competitive Companies may need additional capital to fund capital expenditures,
working capital, debt service and cash flow deficits during the period in which
Competitive Companies is expanding and developing its business and deploying its
networks, services and systems. Competitive Companies estimates, based on its
current business plan, that approximately $15 million of capital will be
necessary to fund the deployment and operation of its networks in its initial
markets during 2000 and the first six months of 2001 to the point at which
operating cash flow from a market will be sufficient to fund its operating and
capital expenditures. This amount includes capital expenditures, working capital
and cash flow deficits, but excludes debt service. Competitive Companies has
raised approximately $1.2 million of capital to date. The actual amount and
timing of its future capital requirements may differ materially from Competitive
Companies' estimates as a result of financial, business and other factors many
of which are beyond its control, as well as prevailing economic conditions.
If Competitive Companies does not interconnect with the incumbent local exchange
carriers, its primary competitors, Competitive Companies may not be able to
provide its services and, as a result, its revenues will be reduced.
Incumbent local exchange carriers are established providers of local telephone
services to all or virtually all telephone subscribers within their respective
service areas. Many new carriers, including Competitive Companies, have
experienced difficulties in working with the incumbent local exchange carriers
with respect to initiating, interconnecting, and implementing the systems used
by these new carriers to order and receive unbundled network elements and
wholesale services and locating the new carriers' equipment in the offices of
the incumbent local exchange carriers. As a new carrier, Competitive Companies
must coordinate with incumbent local exchange carriers so that Competitive
Companies can provide local service to customers on a timely and competitive
basis. The Telecommunications Act created incentives for regional Bell operating
companies to cooperate with new carriers and permit access to their facilities
by denying such companies the ability to provide in-region long distance
services until they have satisfied statutory conditions designed to open their
local markets to competition. The regional Bell operating companies in its
markets are not yet permitted by the FCC to offer long distance services. These
companies may not be accommodating to it once they are permitted to offer long
distance service. If Competitive Companies cannot obtain the cooperation of a
regional Bell operating company in a region, whether or not it has been
authorized to offer long distance service, its ability to offer local services
in such region on a timely and cost-effective basis will be harmed.
If Competitive Companies does not maintain peering arrangements with Internet
service providers, the profitability of its Internet access services will
suffer.
In the past, major Internet service providers routinely exchanged traffic with
other Internet service providers that met technical criteria on a peering basis,
meaning that each Internet service provider accepted traffic routed to Internet
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addresses on their system from their peers on a reciprocal basis, without
payment of compensation. However, since 1997 UUNET Technologies, Inc., the
largest Internet service provider, has been greatly restricting the use of
peering arrangements with other providers and has been imposing charges for
accepting traffic from providers other than its peers. Other major Internet
service providers have adopted similar policies. Competitive Companies presently
has peering arrangements through its wholesale Internet service provider, but
cannot assure you that Competitive Companies will be able to maintain peer
status with any of the major nationwide Internet service providers in the
future, or that Competitive Companies will in the future be able to terminate
traffic on Internet service providers' networks at favorable prices. The
profitability of its Internet access services, and related services such as Web
site hosting, could be harmed if Competitive Companies is unable to continue to
maintain peering arrangements with Internet service providers.
Competitive Companies' offering and maintaining of long distance services is
affected by its ability to establish effective resale agreements. If it does not
establish or maintain these relationships, its revenues may be reduced.
As part of its one-stop shopping offering of bundled telecommunications services
to its customers, Competitive Companies offers long distance services.
Competitive Companies has relied and will continue to rely on other carriers to
provide transmission and termination services for all of its long distance
traffic. Competitive Companies will continue to enter into resale agreements
with long distance carriers to provide it with transmission services. Such
agreements typically provide for the resale of long distance services on a
per-minute basis and may contain minimum volume commitments. Negotiation of
these agreements involves estimates of future supply and demand for transmission
capacity as well as estimates of the calling pattern and traffic levels of its
future customers. If Competitive Companies fails to meet its minimum volume
commitments, Competitive Companies may be obligated to pay underutilization
charges; and if Competitive Companies underestimates its need for transmission
capacity, Competitive Companies may be required to obtain capacity through more
expensive means.
Competitive Companies' principal competitors for local services, the incumbent
local exchange carriers, and potential additional competitors, have advantages
that may harm Competitive Companies' ability to compete with them.
The telecommunications industry is highly competitive. Many of its current and
potential competitors in the local market have financial, technical, marketing,
personnel and other resources, including brand name recognition, substantially
greater than ours, as well as other competitive advantages over it. In each of
the markets targeted by it, Competitive Companies will compete principally with
the incumbent local exchange carrier serving that area and they enjoy advantages
that may harm Competitive Companies' ability to compete with them. Incumbent
local exchange carriers also have long-standing relationships with federal and
state regulatory authorities. FCC and state administrative decisions and
initiatives provide the incumbent local exchange carriers with pricing
flexibility for their:
- private lines, which are private, dedicated telecommunications
connections between customers;
- special access services, which are dedicated lines from a customer to a
long distance company provided by the local phone company; and
- switched access services, which refers to the call connection provided by
the local phone company's switch between a customer's phone and the long
distance company's switch.
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In addition, with respect to competitive access services, such as special access
services as opposed to switched access services, the FCC is considering allowing
incumbent local exchange carriers increased pricing flexibility and deregulation
for such access services either automatically or after certain competitive
levels are reached. If the incumbent local exchange carriers are allowed by
regulators to offer discounts to large customers through contract tariffs,
engage in aggressive volume and term discount pricing practices for their
customers, and/or seek to charge competitors excessive fees for interconnection
to their networks, competitors such as Competitive Companies could be materially
harmed. If future regulatory decisions afford the incumbent local exchange
carriers increased pricing flexibility or other regulatory relief, such
decisions could also harm competitors such as it.
Competitive Companies also faces, and expects to continue to face, competition
in the local market from other current and potential market entrants, including
long distance carriers seeking to enter, reenter or expand entry into the local
exchange marketplace such as AT&T, MCI WorldCom and Sprint, and from other
competitive local exchange carriers, competitive access providers, cable
television companies, electric utilities, microwave carriers, wireless telephone
system operators and private networks built by large end users. In addition, the
development of new technologies could give rise to significant new competitors
in the local market.
Significant competition in providing long distance and Internet services could
reduce the demand for and profitability of Competitive Companies' services.
Competitive Companies also faces significant competition in providing long
distance and Internet services. Many of these competitors have greater
financial, technological, marketing, personnel and other resources than those
available to it.
The long distance telecommunications market has numerous entities competing for
the same customers and a high average turnover rate, as customers frequently
change long distance providers in response to the offering of lower rates or
promotional incentives. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline.
Competitive Companies face competition from large carriers such as AT&T, MCI
WorldCom and Sprint and many smaller long distance carriers. Other competitors
are likely to include regional Bell operating companies providing long distance
services outside of their local service area and, with the removal of regulatory
barriers, long distance services within such local service areas; other
competitive local exchange carriers; microwave and satellite carriers; and
private networks owned by large end users. Competitive Companies may also
increasingly face competition from companies offering local and long distance
data and voice services over the Internet. Such companies could enjoy a
significant cost advantage because they do not currently pay many of the charges
or fees that Competitive Companies has to pay.
The Internet services market is highly competitive and Competitive Companies
expects that competition will continue to intensify. Its competitors in this
market include Internet service providers, other telecommunications companies,
online services providers and Internet software providers.
Competitive Companies' need to comply with extensive government regulation can
increase its costs and slow its growth.
Competitive Companies' networks and the provision of telecommunications services
are subject to significant regulation at the federal, state and local levels.
Delays in receiving required regulatory approvals or the enactment of new
adverse regulation or regulatory requirements may slow its growth and have a
material adverse effect upon it.
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The FCC exercises jurisdiction over it with respect to
interstate and
international services. Competitive Companies must obtain, and have obtained
through its subsidiary, Competitive Communications, Inc., prior FCC
authorization for resale, of international long distance services. Additionally,
Competitive Companies files publicly available documents detailing its services,
equipment and pricing, also known as tariffs with the FCC for both international
and domestic long-distance services.
State regulatory commissions exercise jurisdiction over it because Competitive
Companies provides intrastate services. Competitive Companies is required to
obtain regulatory authorization and/or file tariffs at state agencies in most of
the states in which Competitive Companies operate. If and when Competitive
Companies seek to build its own network segments, local authorities regulate its
access to municipal rights-of-way. Constructing a network is also subject to
numerous local regulations such as building codes and licensing. Such
regulations vary on a city-by-city and county-by-county basis.
Regulators at both the federal and state level require it to pay various fees
and assessments, file periodic reports, and comply with various rules regarding
the contents of its bills, protection of subscriber privacy, and similar matters
on an on-going basis.
Competitive Companies cannot assure you that the FCC or state commissions will
grant required authority or refrain from taking action against it if Competitive
Companies is found to have provided services without obtaining the necessary
authorizations, or to have violated other requirements of their rules and
orders. Regulators or others could challenge its compliance with applicable
rules and orders. Such challenges could cause it to incur substantial legal and
administrative expenses.
Deregulation of the telecommunications industry involves uncertainties, and the
resolution of these uncertainties could reduce Competitive Companies' revenues.
The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act remains
subject to judicial review and additional FCC rulemaking, and thus it is
difficult to predict what effect the legislation will have on it and its
operations. There are currently many regulatory actions underway and being
contemplated by federal and state authorities regarding interconnection pricing
and other issues that could result in significant changes to the business
conditions in the telecommunications industry.
The regulation of interconnection with incumbent local exchange carriers
involves uncertainties, and the resolution of these uncertainties could hurt
Competitive Companies' business.
Although the incumbent local exchange carriers are required under the
Telecommunications Act to unbundle and make available elements of their network
and permit it to purchase only the origination and termination services that
Competitive Companies need, thereby decreasing its operating expenses, such
unbundling may not be done as quickly as Competitive Companies require and may
be priced higher than Competitive Companies expects. This is important because
Competitive Companies relies on the facilities of these other carriers to
connect to its high capacity digital switches so that Competitive Companies can
provide services to its customers. Its ability to obtain these interconnection
agreements on favorable terms, and the time and expense involved in negotiating
them, can be harmed by legal developments.
A recent Supreme Court decision vacated a FCC rule determining which network
elements the incumbent local exchange carriers must provide to competitors on an
unbundled basis. Competitive Companies expects that the FCC will conduct a
rulemaking to adopt new standards for unbundling of network elements in
conformance with this decision. The implementation of these and other FCC rules
may lead to further litigation. This may complicate its interconnection
negotiations, and may harm Competitive Companies' existing agreements and
operations.
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The regulation of access charges involves uncertainties, and the resolution of
these uncertainties could reduce Competitive Companies' revenues.
To the extent Competitive Companies provides long-distance, often referred to as
interexchange, telecommunications service, Competitive Companies is required to
pay access charges to other local exchange carriers when Competitive Companies
use the facilities of those companies to originate or terminate interexchange
calls. As a competitive local exchange carrier, Competitive Companies will also
provide access services to other long distance service providers. The interstate
access charges of incumbent local exchange carriers are subject to extensive
regulation by the FCC, while those of competitive local exchange carriers are
subject to a lesser degree of FCC regulation, but remain subject to the
requirement that all charges be just, reasonable, and not unreasonably
discriminatory. Disputes have arisen regarding the regulation of access charges
and these may be resolved in a manner that reduce its revenues.
The FCC has made major changes in the interstate access charge structure. The
manner in which the FCC implements and monitors these increased pricing
flexibility changes could have a material adverse effect on its ability to
compete in providing interstate access services.
Some interexchange carriers, including AT&T, have also asked the FCC to take
regulatory action to prevent competitive local exchange carriers from charging
allegedly excessive access charges. Although no complaints have been filed
against it, Competitive Companies will be providing access service to
interexchange carriers and Competitive Companies could be subject in the future
to allegations that its charges for this service are unjust and unreasonable. In
that event, Competitive Companies would have to provide the FCC with an
explanation of how Competitive Companies set its rates and justify them as
reasonable. Competitive Companies can give no assurance that the FCC will accept
its rates as reasonable. If its rates are reduced by regulatory order, this
could harm its profitability.
If Competitive Companies does not continually adapt to technological change,
Competitive Companies could lose customers and market share.
The telecommunications industry is subject to rapid and significant changes in
technology, and Competitive Companies relies on outside vendors for the
development of and access to new technology. The effect of technological changes
on its business cannot be predicted. Competitive Companies believe its future
success will depend, in part, on its ability to anticipate or adapt to such
changes and to offer, on a timely basis, services that meet customer demands.
Competitive Companies may not be able obtain access to new technology on a
timely basis or on satisfactory terms. Any failure by it to obtain new
technology could cause it to lose customers and market share.
The price of Competitive Companies' stock may fall if its insiders sell a large
number of their shares. It may also fall if non-insiders sell their shares as
well.
After the merger, four of Competitive Companies' principal executive officers
and other insiders will own an aggregate of ******** restricted shares. These
shares may only be sold in compliance with Rule 144, except that there is no one
year holding period for **** of these shares because these shares are being
issued under this registration statement. After the merger, *number of
non-insiders will own an aggregate of ******** restricted shares. These
non-insiders are not subject to the restrictions of Rule 144, and all of these
non-insider shares may be sold immediately.
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Rule 144 generally provides that a person owning shares subject to the Rule who
has satisfied or is not subject to a one year holding period for the restricted
securities may sell, within any three month period - provided Competitive
Companies is current in its reporting obligations under the Exchange Act
-subject to certain manner of resale provisions, an amount of restricted
securities which does not exceed 1% of a company's outstanding common stock
every three months.
A sale of shares by these security holders, whether under Rule 144 or otherwise,
may have a depressing effect upon the price of its common stock in any market
that might develop after the merger.
MERGER AND ASSET PURCHASE APPROVALS
Approval of the merger
On October 8, 1999, Michael T. Williams as the sole member of Third Enterprise
Service Group's board of directors approved the merger proposal. More than 90%
of the stockholders of Third Enterprise Service Group approved the merger
proposal on the same date.
On December 15, 1999, the board of directors of Competitive Companies
unanimously approved the merger proposal. Based upon the ownership of more than
50% of Competitive Companies common and preferred stock by officers, directors
and affiliates, it appears that a favorable vote by stockholders of Competitive
Companies is assured.
On August 7, 2000, all Huntington approved the agreement in accordance with the
terms of its partnership agreement.
MERGER AND ASSET PURCHASE TRANSACTIONS
The following table contains comparative share information for shareholders of
Competitive Companies, partners in Huntington Partners and shareholders in Third
Enterprise Service Group immediately after the closing of the merger.
<TABLE>
<CAPTION>
The former shareholders of The former partners of The current shareholders Total
Competitive Companies* Huntington of Third Enterprise
Service Group
----------------- ---------------------------- ----------------------- ---------------------------- -----------------
<S> <C> <C> <C> <C> <C>
Number 4,907,061 1,000,000 125,000 6,032,061
----------------- ---------------------------- ----------------------- ---------------------------- -----------------
Percentage 81.3% 16.6% 2.1% 100%
----------------- ---------------------------- ----------------------- ---------------------------- -----------------
</TABLE>
*This assumes no shares of Class A preferred stock or Class B preferred stock
are converted. If they were, there would be an aggregate of an additional
20,000,000 shares of common stock upon conversion of the Class A shares and an
unknown number, if any, additional shares to be issued upon conversion of Class
B shares. Also assumes no stock options that have not been exercised, but are
currently exercisable, are converted. If they were, there would be an aggregate
of an additional 2,043,000.
The agreements provide that at the closing of the merger, Third Enterprise
Service Group will
o Change its name to Competitive Companies
o Change its state of incorporation to Nevada
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o Adopt Competitive Companies' articles and bylaws
o Elect, effective upon the effectiveness of the merger, new
officers and a new board of directors to consist of the current
officers and current directors of Competitive Companies
The merger agreement provides that Competitive Companies' shareholders who vote
against the merger are entitled to dissenters' rights with respect to the
proposed receipt of shares of our name common stock as set forth in Nevada law.
None of the shares of Third Enterprise Service Group common stock outstanding
prior to the closing of the merger will be converted or otherwise modified in
the merger and all of the shares of Third Enterprise Service Group will be
outstanding capital stock of Third Enterprise Service Group after the closing of
the merger.
The transactions will be consummated promptly after this prospectus is declared
effective by the SEC and upon the satisfaction or waiver of all of the
conditions to the closing of the merger. The merger will become effective on the
date and time a properly executed articles of merger are filed with the offices
of the secretary of state of Nevada. Thereafter, Competitive Companies will
cease to exist and Third Enterprise Service Group will be the surviving
corporation in the merger.
Fractional shares.
As of the date of this prospectus, there were no fractional shares of
Competitive Companies' common stock outstanding. Because each outstanding share
of Competitive Companies' common stock will be entitled to receive one share of
Third Enterprise Service Group's common stock under the terms of the merger
agreement, there will be no fractional shares issued in the merger.
Bulletin board listing
Third Enterprise Service Group will be subject to the reporting requirements of
the securities exchange act of 1934 after the merger as a result of its filing
of a form 8-A electing to be a reporting company subject to the requirements of
the 1934 act.
Upon closing of the merger, our name will seek to become listed on the over the
counter bulletin board under the symbol "COCO." If and when listed, the
Competitive Companies' shareholders will hold shares of a publicly-traded Nevada
corporation subject to compliance with the reporting requirements of the
exchange act. Because the state of incorporation, articles and bylaws of Third
Enterprise Service Group will be the same as those of Competitive Companies
prior to the merger, the rights of shareholders of Competitive Companies will
not change as a result of the merger.
Background of the merger
As discussed under Third Enterprise Service Group Business, Third Enterprise
Service Group was formed as a vehicle to acquire through a registered securities
offering a private company desiring to become an SEC reporting company in order
thereafter to secure a listing on the over the counter bulletin board. Third
Enterprise Service Group agreed to acquire Competitive Companies because this
was Competitive Companies' objective.
Although other methods of achieving its objectives were available, including
alternate forms of SEC registration statements, Competitive Companies chose the
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method involving a reverse merger with Third Enterprise Service Group because it
believes the optimal way for it to achieve its objectives of becoming an SEC
reporting company in order thereafter to secure a listing on the over the
counter bulletin board is:
o To be acquired by an acquisition company
o To have securities to be issued to its shareholders upon the merger registered
on Form S-4
o To have that registration statement declared effective before holding a formal
vote on the proposed merger
Competitive Companies also believes this method is the optimal way for it to:
o Increase the visibility of Competitive Companies' business, which could
be helpful in further developing and commercializing Competitive
Companies' products.
Competitive Companies believes that public, trading companies
have greater visibility than private companies.
o Facilitate Competitive Companies' ability to raise capital in the public
markets.
Competitive Companies believes that public, trading companies
have an easier time raising capital than private companies.
o Potentially improve Competitive Companies' stockholders' ability to sell their
shares in the over-the-counter market.
Competitive Companies believes that public, trading companies
provide greater investor liquidity than private companies.
Contacts between the Parties
In November, 1998, Mr. Michael Godfree, Director of Competitive Companies,
entered into discussions with Mr. Michael T. Williams, Third Enterprise Service
Group's President. After some additional discussions between the parties,
Competitive Companies indicated that it would be interested in discussing a
possible business combination with one of Mr. Williams' acquisition companies he
was contemplating forming, such as Third Enterprise Service Group. Thereafter,
there were numerous telephone conversations between the companies relating to
various aspects of the potential merger, including in-depth discussions
concerning the steps that needed to be taken to close the merger.
Following these discussions, representatives of Third Enterprise Service Group
and Competitive Companies negotiated the basic structure, terms and conditions
of the merger. After having reached resolution on all open issues, a merger
agreement was drafted and Competitive Companies convened a special meeting of
its board of directors at which the agreement of merger and the other
transactions required by the merger agreement were discussed and reviewed.
Thereafter, the board of directors of Competitive Companies unanimously adopted
and approved the agreement of merger and the transactions required by the merger
agreement.
Neither Third Enterprise Service Group nor Competitive Companies requested or
received, or will receive, an opinion of an independent investment banker as to
whether the merger is fair, from a financial point of view, to Third Enterprise
Service Group and its stockholders or to Competitive Companies and its
shareholders.
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Reasons for the merger
Third Enterprise Service Group' reasons for the merger.
In considering the merger, the Third Enterprise Service Group board took note of
the fact that Competitive Companies could produce audited financial statements
and other information necessary for the filing of this prospectus and agreed to
pay a merger fee to Third Enterprise Service Group, the Third Enterprise Service
Group board determined that the merger proposal was fair to, and in the best
interests of, Third Enterprise Service Group and the Third Enterprise Service
Group's stockholders.
Competitive Companies 's reasons for the merger.
o Increase the visibility of Competitive Companies' business, which could be
helpful in further developing and commercializing Competitive Companies'
products.
Competitive Companies believes that public, trading companies
have greater visibility than private companies.
o Facilitate Competitive Companies' ability to raise capital in the public
markets.
Competitive Companies believes that public, trading companies
have an easier time raising capital than private companies.
o Potentially improve Competitive Companies' shareholders' ability to sell their
shares in the over-the-counter market.
Competitive Companies believes that public, trading companies
provide greater investor liquidity than private companies.
Interests of Certain Persons in the Merger
Upon the closing of the merger, the current directors and executive officers of
Competitive Companies will become the directors and executive officers of the
surviving corporation.
Material Federal Income Tax Consequences
The following discussion summarizes all the material federal income tax
consequences of the merger. This discussion is based on currently existing
provisions of the Internal Revenue code of 1986, existing and proposed Treasury
Regulations and current administrative rulings and court decisions, all of which
are subject to change. Any change, which may or may not be retroactive, could
alter the tax consequences to the Competitive Companies shareholders, as
described below.
We have addressed this opinion to most of the typical shareholders of companies
such as Competitive Companies. However, some special categories of shareholders
listed below will have special tax considerations that need to be addressed by
their individual tax advisors:
o Dealers in securities
o Banks
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o Insurance companies
o Foreign persons
o Tax-exempt entities
o Taxpayers holding stock as part of a conversion, straddle, hedge or
other risk reduction transaction
o Taxpayers who acquired their shares in connection with stock option or
stock purchase plans or in other compensatory transactions
We also do not address the tax consequences of the merger under foreign, state
or local tax laws.
We strongly urge to consult their own tax advisors as to the specific
consequences of the merger to them, including the applicable federal, state,
local and foreign tax consequences of the merger in their particular
circumstances.
Neither Third Enterprise Service Group Industry Co. nor Competitive Companies
has requested, or will request, a ruling from the Internal Revenue Service, IRS,
with regard to any of the federal income tax consequences of the merger. The tax
opinions will not be binding on the IRS or preclude the IRS from adopting a
contrary position.
It is the opinion of Williams Law Group, P.A., counsel to Third Enterprise
Service Group Industry Co., that the merger will constitute a reorganization
under Section 368(a) of the code. The tax description set forth below has been
prepared and reviewed by Williams Law Group, and in their opinion, to the extent
the description relates to statements of law, it is correct in all material
respects. In a prior filing of a similar transaction with the Securities and
Exchange Commission, the staff requested us to add a statement that the
following tax consequences are implicit in the firm's opinion that the merger is
a 368(a) reorganization.
As a result of the merger's qualifying as a reorganization, the following
federal income tax consequences will, under currently applicable law, result:
o No gain or loss will be recognized for federal income tax purposes by
the holders of Competitive Companies common stock upon the receipt of
Third Enterprise Service Group Industry Co. common stock solely in
exchange for Competitive Companies common stock in the merger, except
to the extent that cash is received by the exercise of dissenters'
rights.
o The aggregate tax basis of the Third Enterprise Service Group Industry
Co. common stock received by Competitive Companies shareholders in the
merger will be the same as the aggregate tax basis of the Competitive
Companies common stock surrendered in merger.
o The holding period of the Third Enterprise Service Group Industry Co.
common stock received by each Competitive Companies shareholder in the
merger will include the period for which the Competitive Companies
common stock surrendered in merger was considered to be held, provided
that the Competitive Companies common stock so surrendered is held as a
capital asset at the closing of the merger.
o A holder of Competitive Companies common stock who exercises
dissenters' rights for the Competitive Companies common stock and
receives a cash payment for the shares generally will recognize capital
gain or loss, if the share was held as a capital asset at the closing
of the merger, measured by the difference between the shareholder's
basis in the share and the amount of cash received, provided that the
payment is not essentially equivalent to a dividend within the meaning
of Section 302 of the code or does not have the effect of a
distribution of a dividend within the meaning of Section 356(a)(2) of
the code after giving effect to the constructive ownership rules of the
code.
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o Neither Third Enterprise Service Group Industry Co. nor Competitive
Companies will recognize gain solely as a result of the merger.
o There is a continuity of interest for IRS purposes with respect to the
business of Competitive Companies. This is because
shareholders of Competitive Companies have represented to us that they
will not, under a plan or intent existing at or prior
to the closing of the merger of the merger, dispose of so much of
their Competitive Companies common stock in anticipation
of the merger, plus the Third Enterprise Service Group Industry Co.
common stock received in the merger that the Competitive
Companies shareholders, as a group, would no longer have a significant
equity interest in the Competitive Companies business
being conducted by Third Enterprise Service Group Industry Co. after
the merger. Our opinion is based upon IRS ruling
guidelines that require eighty percent continuity, although the
guidelines do not purport to represent the applicable substantive law.
A successful IRS challenge to the reorganization status of the merger would
result in significant tax consequences. For example,
o Competitive Companies would recognize a corporate level gain or loss on
the deemed sale of all of its assets equal to the difference between
o the sum of the fair market value, as of the closing of the
merger, of the Third Enterprise Service Group Industry Co.
common stock issued in the merger plus the amount of the
liabilities of Competitive Companies assumed by Third
Enterprise Service Group Industry Co.
and
o Competitive Companies' basis in the assets
o Competitive Companies shareholders would recognize gain or loss
with respect to each share of Competitive Companies common stock
surrendered equal to the difference between the shareholder's
basis in the share and the fair market value, as of the closing of
the merger, of the Third Enterprise Service Group Industry Co.
common stock received in merger therefore.
In this event, a shareholder's aggregate basis in the Third Enterprise Service
Group Industry Co. common stock so received would equal its fair market value
and the shareholder's holding period for this stock would begin the day after
the merger is consummated.
Even if the merger qualifies as a reorganization, a recipient of Third
Enterprise Service Group Industry Co. common stock would recognize income to the
extent if, among other reasons any shares were determined to have been received
in merger for services, to satisfy obligations or in consideration for anything
other than the Competitive Companies common stock surrendered. Generally, income
is taxable as ordinary income upon receipt. In addition, to the extent that
Competitive Companies shareholders were treated as receiving, directly or
indirectly, consideration other than Third Enterprise Service Group Industry Co.
common stock in merger for Competitive Companies' shareholder's common stock,
gain or loss would have to be recognized.
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This discussion does not address the tax consequences of the merger to holders
of Competitive Companies options, who, as a result of the merger, will receive
Third Enterprise Service Group, Inc. options. Holders of the securities should
consult their tax advisors with respect to the tax consequences.
Termination.
At any time prior to closing, the merger agreement may be terminated, and the
merger abandoned under certain circumstances, including:
o By mutual consent of Third Enterprise Service Group and
Competitive Companies
o By either party if any of the other party's representations and
warranties contained in the merger agreement shall be or shall
have become inaccurate, or if any of the other party's covenants
contained in the merger agreement shall have been breached
o By either party if a court of competent jurisdiction or other
governmental body shall have issued a final and nonappealable
order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or
otherwise prohibiting the merger
o By Competitive Companies if the consents have been solicited and
the merger agreement shall not have been adopted and approved by
the required vote
o By Competitive Companies if Competitive Companies reasonably
determines that the timely satisfaction of any condition to its
obligations to consummate the merger has become impossible or
unlikely.
Dissenters' Rights
The following summary of dissenters' rights under Nevada law is qualified in its
entirety by reference to section 92, Nevada Statutes, but includes all material
aspects of that section. Third Enterprise Service Group has filed copies of
these statutes as exhibits to the registration statement.
Competitive Companies stockholders who oppose the proposed merger will have the
right to receive payment for the value of their shares as set forth in sections
92a.300 through 92a.500 of the Nevada law. The dissenters' rights will be
available only to stockholders of Competitive Companies who refrain from voting
in favor of the merger.
Voting against the merger will not constitute notifying Competitive Companies of
the intention to demand payment if the merger is closed.
A stockholder must exercise dissenters' rights for all of the shares that he or
she owns.
Since the vote to authorize the merger will take place by written consent,
Competitive Companies will be required to notify by mail those stockholders who,
by virtue of having refrained from voting in favor of the merger, are entitled
to payment for their shares. Dissenters notices must be sent no later than ten
days after consummation of the merger. The notice must
o State where demand for payment must be sent
o State when certificates must be deposited
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o State the restrictions on transfer of shares that are not evidenced
by a certificate once demand has been made
o Supply a form on which to demand payment
o Set a date by which demand must be received
o Include a copy of the relevant portions of the Nevada law
Unless a stockholder acquired his or her shares after Competitive Companies
sends the dissenters notices, Competitive Companies must calculate the fair
market value of the shares plus interest, and within 30 days of the date
Competitive Companies receives the demand, pay this amount to any stockholder
that properly exercised dissenters' rights and deposited certificates with
Competitive Companies. If Competitive Companies does not pay within 30 days, a
stockholder may enforce in court Competitive Companies' obligation to pay. The
payment must be accompanied by
o Competitive Companies' interim balance sheet, o A statement of the fair market
value of the shares, o An explanation of how the interest was calculated, o A
statement of dissenters' right to demand payment, and o A copy of the relevant
portions of the Nevada Law.
Within 30 days of when Competitive Companies pays a dissenting stockholder for
his or her shares, the stockholder has the right to challenge Competitive
Companies' calculation of the fair market value of the shares and interest due,
and must state the amount that he or she believes to represent the true fair
market value and interest of the shares. If Competitive Companies and the
stockholder are not able to settle on an amount, Competitive Companies may
petition a court within 60 days of making payment to the dissenting stockholder.
If Competitive Companies does not either settle with the stockholder or petition
a court for a determination within 60 days, Competitive Companies is obligated
to pay the stockholder the amount demanded that exceeds Competitive Companies'
calculation of fair market value plus interest. All dissenters are entitled to
judgment for the amount by which the fair market value of their shares is found
to exceed the amount previously remitted, with interest.
It is a condition to Competitive Companies' obligations to consummate the merger
that the holders of no more than 10% of the outstanding shares of Competitive
Companies' common stock are entitled to dissenters' rights. If demands for
payment are made with respect to more than 10%, of the outstanding shares of
Competitive Companies' common Stock, and, as a consequence more than 10% of the
shareholders of Competitive Companies' become entitled to exercise dissenters'
rights, then Competitive Companies will not be obligated to consummate the
merger.
Accounting Treatment
For accounting purposes, the merger will be treated as an acquisition by a
predecessor corporation.
Merger Procedures
Unless otherwise designated by a Competitive Companies shareholder on the
transmittal letter, certificates representing shares of Third Enterprise Service
Group common stock issued to Competitive Companies shareholders will be issued
and delivered to the tendering Competitive Companies shareholder at the address
on record with Competitive Companies . In the event of a transfer of ownership
of shares of Competitive Companies common Stock represented by certificates that
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are not registered in the transfer records of Competitive Companies , the shares
may be issued to a transferee if the certificates are delivered to the transfer
agent, accompanied by all documents required to evidence the transfer and by
evidence satisfactory to the transfer agent that any applicable stock transfer
taxes have been paid. If any certificates shall have been lost, stolen, mislaid
or destroyed, upon receipt of
o An affidavit of that fact from the holder claiming the certificates to be
lost, mislaid or destroyed.
o The bond, security or indemnity as the parent corporation and the merger agent
may reasonably require.
o Any other documents necessary to evidence and effect the bona fide merger, the
transfer agent shall issue to holder the shares into which the shares
represented by the lost, stolen, mislaid or destroyed.
o Certificates have been converted.
Neither Third Enterprise Service Group, Competitive Companies , nor the transfer
agent is liable to a holder of Competitive Companies' common stock for any
amounts paid or property delivered in good faith to a public official under any
applicable abandoned property law. Adoption of the merger agreement by the
Competitive Companies' shareholders constitutes ratification of the appointment
of the transfer agent.
After the closing of the merger, holders of certificates will have no rights
with respect to the shares of Competitive Companies common stock represented
thereby other than the right to surrender the certificates and receive in merger
the shares of Third Enterprise Service Group common stock to which the holders
are entitled.
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COMPETITIVE COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS-COMPETITIVE COMPANIES, INC.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues increased $131,177, or 19.8%, to $793,880 for the
first six months of 2000 from $662,703 for the first six months of 1999. This
increase was primarily due to an increase in the volume of sales to
multi-dwelling unit customers resulting from our acquisition from a competitor
of an existing telephone system and rights-of-entry that services two apartment
complexes with 706 passings.
Gross Margin. Gross margin increased $110,823, or 70.4%, to $268,306 for
the first six months of 2000 from $157,483 for the first six months of 1999.
During the first six months, gross margin as a percentage of total revenues
increased to 33.8% in 2000 from 23.8% in 1999 primarily because of two factors.
A substantial portion of the increase was due to the negotiation of lower
carrier rates from other long distance providers from whom we purchase
intrastate, interstate and international service. A portion of the savings
related to the reduced rates was passed on to customers. Another significant
factor that improved the gross margin was the allocation of the existing direct
labor over a larger revenue base. Although we acquired two apartment complexes
with an additional 706 passings, we were able to assimilate these without
additional customer service representatives, technical support, on-site
technicians or management personnel.
Other Operating Expenses. Other operating expenses increased $24,597, or
8.7%, to $305,711in the first six months of 2000 from $281,114 in the first six
months of 1999. The increase is primarily due to a $32,549 increase in employee
compensation and benefits and related addition of a Sales and Marketing
Director, a $28,661 increase in provision for bad debts, and a $22,402 increase
in professional fees associated with the negotiations for the buyout and
acquisition of current partnerships and costs related to our filing to become a
publicly trading company. These increases were partially offset by a $23,522
reduction in occupancy and equipment costs, and a $35,493 reduction in general
and administrative costs. Other operating expenses as a percentage of total
revenues decreased to 38.5% in the first half of 2000 from 42.4% in the first
half of 1999 primarily due to the 19.8% increase in revenues during the period.
Other Income (Expense), Net. The total other expense-net, decreased by
$27,123 for the first six months of 2000 to $35,171, from total other
expense-net of $62,294 for the first six months of 1999. This resulted in a
43.5% decrease in total other expense-net for the first six months of 2000
compared to the first six months of 1999. Interest and other income (expense),
net, is related to interest expenses on notes payable and equipment leases, and
interest income from financial institutions on the company's cash.
Many securities analysts use the measure of earnings before deducting interest,
taxes, depreciation and amortization, also commonly referred to as "EBITDA," as
a way of evaluating telecommunications companies and other companies that have
inherently high initial capital investment requirements. Telecommunications
companies initial capital investments are high due to the expenses incurred in
developing their network of switches, securing interconnection agreements, and
meeting regulatory requirements. We had EBITDA loss of $2,688 and $144,000 for
the first six months of 2000 and 1999, respectively.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Total revenues increased $173,443, or 13.6%, to $1,452,489 in
1999 from $1,279,046 in 1998. This increase was primarily due to an increase in
the volume of sales to multi-dwelling unit customers resulting from our
acquisition in mid-1999 from a competitor of an existing telephone system and
rights-of-entry that services two apartment complexes with 706 passings.
The majority of the revenue for both years was derived principally from the
sale of long distance and local telephone service to multi-dwelling unit
subscribers and consisted of:
- the monthly recurring charge for basic service;
- usage based charges for local and long distance calls;
- charges for services, such as call waiting and call forwarding; and
- to a lesser extent, non-recurring charges, such as charges for
additional
lines for an existing customer.
Since we operate under shared tenant services provisions for the multi-dwelling
unit subscribers, we can bundle our local and long distance services. Customers
who chose our local calling service are also required to subscribe to our
competitively priced long distance services. If the customer does not want our
long distance services as part of the bundled service, at his request we connect
his service to the incumbent local exchange carrier who allows him to choose his
long distance carrier. As of March 31, 2000, approximately 85% of all
multi-dwelling unit subscribers selected our bundled service over the incumbent
local exchange carrier and another long distance service provider.
Gross Margin. Gross margin increased $41,399, or 13.1%, to $357,034 in 1999
from $315,635 in 1998 primarily due to an increase in revenues in 1999. Gross
margin as a percentage of total revenues remained relatively the same at 24.6%
in 1999 compared to 24.7% in 1998.
Other Operating Expenses. Other operating expenses increased $15,541,463 or
3,341.4%, to $16,006,582 in 1999 from $465,119 in 1998. The increase was
primarily attributable to expensing $15,443,277 in performance based preferred
stock options that were awarded to our management personnel, and other stock
based compensation (see Consolidated Financials Statements). Without considering
the stock related based compensation expense of $15,443,277, the remaining other
operating expenses for 1999 increased 98,186 or 21.1% to $563,305 from $465,119
in 1998. The increase is primarily due to a $26,680 increase in expenses related
to the company's move to a larger, consolidated, leased facility, related
facilities improvements, and equipment purchases; a $56,171 increase in
professional fees associated with the negotiations for the buyout and
acquisition of current partnerships and costs related to our filing to become a
publicly trading company, a $88,406 increase in general and administrative
expenses primarily related to private placement costs, costs associated with
filing for competitive local exchange carrier, and interconnection costs for
California . These increases were partially offset by a $35,354 reduction in
employee compensation and benefits, and a $37,717 reduction in provision for bad
debt. Even thought the number of employees increased from 10 during 1998 to 12
during 1999, employee compensation was reduced by hiring less expensive
replacement personnel. Other operating expenses as a percentage of total
revenues increase to 1102.0% in 1999 from 36.4% in 1998 primarily due to 1999
performance based preferred stock options that were awarded to our management
personnel, and other stock based compensation (see Consolidated Financials
Statements). Without considering the stock related based compensation expense,
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other operating expenses as a percentage of total revenues increased to 38.8% in
1999 from 36.4% in 1998.
Other Income (Expense), Net. The total other expense-net, increased by
$52,435, or 210.5%, to $77,343 in 1999 from $24,908 in 1998. Interest and other
income (expense), net, is related to interest expenses on notes payable and
equipment leases.
Income Taxes. In 1999 the company had net operating loss carryforwards of
approximately $637,000 for income tax purposes. These carryforwards expire at
various times through the year ended December 31, 2019.
Many securities analysts use the measure of earnings before deducting
interest, taxes, depreciation and amortization, also commonly referred to as
"EBITDA," as a way of evaluating telecommunications companies and other
companies that have inherently high initial capital investment requirements.
Telecommunications companies initial capital investments are high due to the
expenses incurred in developing their network of switches, securing
interconnection agreements, and meeting regulatory requirements. We had EBITDA
loss of $117,490 and $843 (without performanced based preferred stock options)
for the year ended December 31, 1999 and December 1998, respectively.
Competitive Companies made capital expenditures of approximately $2,155 and
$45,927 during 1998 and 1999, respectively, for property, plant, equipment,
software and hardware necessary in conducting its business. We also used
capital, raised from the sale of our stock, during 1999 to fund our operations.
On December 31, 1999, we owned and/or managed switching equipment located
in 8 locations servicing 10 multi-dwelling units with a total of 3,975 passings
(apartments) consisting of 2,975 telephone passings and 990 cable television
passings.
We do not expect to continue to experience increasing operating losses and
negative EBITDA as a result of our development activities and as we expand our
operations. We expect to achieve positive EBITDA by the second half of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash received from operations was primarily from telephone and cable
subscriber revenue generated by our telephone and cable TV service at apartment
complexes, and administration and billing revenue from management functions we
performed for properties owned by partnerships.
Net cash used in operating activities for the six months ended June 30,
2000, totaled $62,058.
Net cash used for investing activities for the six months ended June 30,
2000, totaled $10,803 and reflects capital expenditures made in support of
operations.
Net cash used in financing activities for the six months ended June 30,
2000, totaled $ 28,207 primarily reflecting proceeds from issuance of common
stock and stockholder advances less repayment on notes and capital leases.
The company had $ 299,604 of cash and cash equivalents at June 30, 2000,
that was a 705.0% increase of $262,387 from $37,217 at June 30, 1999.
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Working capital decreased by $55,499 from $339,764 at December 31, 1999, to
$ $284,265 at June 30, 2000. We believe that the proceeds from this offering,
together with the cash flows from operations and lease financing of switch and
headend equipment will be sufficient to meet our working capital needs for at
least the next 18 months.
Year Ended December 31, 1999
Cash received from operations was from telephone and cable subscriber
revenue generated by our telephone and cable TV service at apartment complexes,
and administration and billing revenue from management functions we performed
for properties owned by partnerships.
Net cash used in operating activities for the year ended December 31, 1999,
totaled $359,836 compared to $165,696 for the year ended December 31, 1998.
Net cash used for investing activities for the year ended December 31,
1999, totaled $45,972 compared to $2,155 for the year ended December 31, 1998,
and reflects capital expenditures made in support of operations.
Net cash from financing activities for the year ended December 31, 1999,
totaled $806,435 compared to $167,851 for the year ended December 31, 1998. Both
primarily reflecting proceeds from issuance of common stock.
The company had $400,672 of cash and cash equivalents at December 31, 1999, that
was a $400,672 increase over December 31, 1998.
We believe that the proceeds from this offering, together with the cash
flows from operations and lease financing of telephone switching installations
and cable TV headends, will be sufficient to meet our working capital needs for
at least the next 18 months.
RESULTS OF OPERATIONS-HUNTINGTON TELECOOMUNICATIONS PARTNERS, L.P.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues decreased $14,435, or 4.0%, to $349,262 for the
first six months of 2000 from $363,697 for the first six months of 1999. This
decrease was primarily due to small changes in calling patterns of customers,
occupancy factors of apartment complexes where our switches are installed, and
competitive pressure from local telephone service providers.
Operating Expenses. Operating expenses increased $14,474, or 3.4%, to
$443,500 in the first six months of 2000 from $429,026 in the first six months
of 1999. The increase is primarily due to an increase in the cost of telephone
long distance and cable services rates.
Net Loss. The net loss increased by $28,909 for the first six months of
2000 to $94,238, from a net loss of $65,329 for the first six months of 1999.
This resulted in a 44.3% increase in net loss for the first six months of 2000
compared to the first six months of 1999.
Affect of Merger. Competitive Companies management believes that the merger
of Huntington Telecommunications Partners, L.P. and Competitive Companies will
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result in a net reduction in costs due to increase efficiencies in operations.
Based on Huntington Telecommunication Partners Statement of Operations for the
six months ending June 30, 2000, we estimate that approximately $100,000 per
year in cost avoidance will result from the merger.
Many securities analysts use the measure of earnings before deducting interest,
taxes, depreciation and amortization, also commonly referred to as "EBITDA," as
a way of evaluating telecommunications companies and other companies that have
inherently high initial capital investment requirements. Telecommunications
companies initial capital investments are high due to the expenses incurred in
developing their network of switches, securing interconnection agreements, and
meeting regulatory requirements. Huntington telecommunications Partners had
EBITDA loss of $45,232 and $24,355 for the first six months of 2000 and 1999,
respectively. Based on this and an estimated $50,000 in cost avoidance, had the
merger occurred on January 1, 2000, we estimate the combined EBITDA profit for
the first six months on 2000 would have been approximately $2,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash received from operations was primarily from telephone and cable
subscriber revenue generated by our telephone and cable TV service at apartment
complexes, and administration and billing revenue from management functions we
performed for properties owned by partnerships.
Net cash provided by operating activities for the six months ended June 30,
2000, totaled $20,672.
Net cash used for investing activities for the six months ended June 30,
2000,totaled $2,336 and reflects capital expenditures made in support of
operations.
Working capital decreased by $47,568 from $99,146 at December 31, 1999, to
$51,578 at June 30, 2000.
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COMPETITIVE COMPANIES BUSINESS
Competitive Companies seeks to be a premier provider of telecommunications
services to residents of multiple dwelling unit buildings, most commonly called
apartment complexes, and other users, including business and residential, in
primary and secondary metropolitan areas across the United States. Competitive
Companies offers an integrated set of telecommunications products and services
including local exchange, local access, domestic and international long
distance, enhanced voice, data and Internet services. Competitive Companies
generally priced these services at a discount of 5% to 10% below the prices
charged by the incumbent local exchange carriers. As a competitive local
exchange carrier in each of its markets Competitive Companies competes primarily
with the incumbent local exchange carriers, called ILECs, such as PacBell,
BellSouth and Southwestern Bell, which have historically had a monopoly in
providing local, and wireline phone service.
The business was founded in 1985 by a management team led by David Kline, Sr.,
the former President, Chief Operating Officer and co-founder of Superior
Communications, Inc.
Competitive Companies believes that the Telecommunications Act, by opening the
local exchange market to competition, has created an attractive opportunity for
new facilities-based competitive local exchange carriers like Competitive
Companies. Most importantly, the Telecommunications Act stated that these
carriers, known as CLECs, should be able to lease the various elements of the
ILECs' networks, which are necessary for the cost-effective provision of
service. This aspect of the Telecommunications Act, which is referred to as
"unbundling" the ILEC networks, has enablesd Competitive Companies to deploy
digital switches with local and long distance capability, and will allow
Competitive Companies to lease deployed wire and fiber optic lines from the
ILECs, other CLECs, and other telecommunications companies to connect its switch
with the ILEC, other CLECs and the Internet backbone. Once traffic volume growth
justifies further capital investment, Competitive Companies may lease dark fiber
or construct its own fiber network.
Competitive Companies has developed procedures, together with a billing and back
office systems called Hartline that Competitive Companies believess will provide
Competitive Companies with a significant competitive advantage in terms of
reducing costs, processing large volumes of orders and providing customer
service. The Hartline systems enables Competitive Companies to enter, schedule
and track a customer's order from the point of sale to the installation and
testing of service. It also includes:
o Trouble management
o Inventory
o Billing
o Collection
o Customer service
In each state where Competitive Companies operates as a competitive local
exchange carrier, Competitive Companies will electronically bond to the ILEC
either directly or through third party services that are currently available at
very competitive rates. Electronic bonding is the on-line and real-time
connection of its operations support systems with those of the ILECs. This will
allow Competitive Companies to create service requests on-line, leading to
faster installations of residential and business customer orders through a
reduction in errors associated with multiple manual inputs. Multi-dwelling unit
customers are services completely by its proprietary Hartline system which does
not require electronic bonding with other carriers. For its business and
residential customer, we expect electronic bonding to improve productivity by
decreasing the period between the time of sale and the time a customer's line is
installed in its network. In addition, we expect that the simplified process
will reduce selling, general and administrative costs.
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Competitive Companies estimates that there are 60 million MDU passings in the
United States. Competitive Companies believes that 20 million of these MDUs have
over 100 passings. The MDU market is a $20 billion annual emerging
telecommunications market, and is anticipated to be for decades to come. Its
business plan covers most of the primary and secondary metropolitan areas in the
U.S. Initially, Competitive Companies will concentrate on the western,
southwestern, and southern United States. The order in which we development of
its market will depend on where we acquire the most lucrative contracts with
multi-dwelling unit owners. Of the MDUs with over 100 passings, Competitive
Companies estimates that fewer than 1,000,000 are using combined private
telephone and television systems. Each month we receive requests from owners of
multi-dwelling units from all over the United States that meet the
installation
criteria for its switches and service. Signing these contracts is contingent on
having sufficient capital to provide for the cost of installing the switching
equipment and covering initial negative cash flow until the subscriber base is
high enough to cover operating costs. Business and residential access lines,
will be added in the areas near these switches and services either through its
own facilities based switches or through resale interconnection agreements with
the ILECs. As of December 31, 1999, Competitive Companies has installed switches
in multi-dwelling unit complexes in three states including California,
Mississippi, and Alabama.
Business Strategy
To accomplish its goal of becoming a premier provider of bundled
telecommunications services to MDUs, business and residential customers,
Competitive Companies has developed a customer-focused business strategy
designed to achieve significant market penetration and deliver superior customer
care while maximizing operating margins. The key components of this strategy
include the following:
Leverage Proven Management Team. Its veteran management team has extensive
experience and past successes in the telecommunications industry. Competitive
Companies believes that its ability to combine and draw upon the collective
talent and expertise of senior management gives Competitive Companies a
competitive advantage in the effective and efficient execution of network
deployment, sales, provisioning, service installation, billing and collection,
and customer service functions.
David Kline II and other key Competitive Companies executives have
significant experience in the critical functions of network operations, sales
and marketing, back office and operations support systems, finance and
regulatory affairs.
Operate as Both a Regulated and Unregulated Carrier. Unlike many of its
competitors, Competitive Companies operates with both a regulated and
non-regulated company. Competitive Communications, Inc. (CCI) being regulated
and CCI Residential Services, Inc. being unregulated.
Under the Telecommunications Act of 1996, its regulated competitive local
exchange carrier or CLEC company, Competitive Communications, can receive
significantly discounted prices from the existing or incumbent local exchange
carriers and tariffed long distance carriers, thereby reducing its costs
compared to the prices we would have to pay without having CLEC status. As a
regulated CLEC, CCI purchases and deploys class 4 telephone switching equipment
and leases transmission capacity from competitive access providers, called CAPS,
other CLECs and incumbent local exchange carriers (ILECs) and long distance
carriers then provides telecommunications services to business and residential
customers and to CCI Residential Services. In this manner, CCI can provide CCI
Residential Services with certain features (like number portability) which are
not currently available to non-CLEC companies. By owning its switches,
Competitive Companies is able to better configure its network to provide
cost-effective solutions for its customers' telecommunications needs. By leasing
transmission capacity, we can:
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- reduce up-front capital expenditures
- avoid risks of "stranded" investment in under-utilized cable/fiber
networks
- enter markets and generate revenue and positive cash flow
more rapidly
- negotiate reduced rates since there are normally several cable/fiber
suppliers in each market area.
Its other company, CCI Residential Services, is a non-regulated Shared
Tenant Service company, and as such, can sign individual agreements with
property owners allowing for payments to the property owner of a portion of the
revenue Competitive Residential receives from the MDU residents on the owner's
property, and legally avoid the more onerous tariff filing requirements of CLECs
thus reducing administrative and legal costs
Target Customers with Integrated Service Offerings. As a CLEC, CCI focuses
principally on providing business and residential customers with
telecommunications services, and on providing Competitive Residential Services
with local and long distance telephone services. Both CCI and CCI Residential
Services, also referred to as CCIRS, will focus principally on providing their
respective end user customers with bundled local, long distance, calling card,
Internet, and cable television (CCIRS only) services. In the future Competitive
Companies may also offer wireless telephone, wireless Internet, cellular, and
paging. Competitive Companies offers "one-stop shopping" by giving its customers
the ability to purchase a comprehensive package of communications services from
a single supplier with one billing for all services. It also offers convenient
integrated billing and a single point of contact for sales and service. It
presently offers the following services in most of its markets:
CCI as a regulated CLEC:
- local and long distance services to business and non-MDU residential
customers,
- calling cards to business and non-MDU residential customers,
- Internet services to business and non-MDU residential customers,
- Internet content control software,
- PC "Lease to Own" program,
- local area network interconnection, and
- resale of ILEC services.
CCIRS as a non-regulated shared tenant service provider:
- local and long distance services to MDU customers,
- calling cards to MDU customers,
- Internet services to MDU customers,
- Internet content control software,
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- PC "Lease to Own" program, and
- Cable/satellite television services to MDU customers.
In addition, we expect to offer the following services beginning in 2000:
- Wireless Internet, cellular telephone service, and paging service,
- Frame relay, a high speed data service used to transmit data between
computers and designed to operate at higher speeds,
- Integrated Services Digital Network ("ISDN"), an internationally agreed
upon standard which, through special equipment, allows two-way,
simultaneous voice and data transmission in digital formats over the
same transmission line,
- Digital Subscriber Lines ("DSL"), which allow high speed digital
connection for carrying voice and data traffic over copper lines,
- carry long distance traffic for other carriers using the excess
capacity of its switches,
- web page design, and
- web server hosting.
These comprehensive services are generally not available from the ILECs, or
available only at high prices. By offering a comprehensive package of
communications services together with traditional local and long distance
services, Competitive Companies believes that we can accelerate its ability to
establish new customer accounts and further improve customer retention.
Competitive Companies focuses primarily on capturing a significant portion of
these customers' local exchange, intraLATA toll, which are the calls that fall
within a local service area, and data traffic. Although Competitive Companies
will principally target MDUs in markets where Competitive Companies believes we
can achieve significant market penetration by providing superior customer care
at competitive prices, it augments its core business strategy by offering
rebates to MDU owners who sign exclusive contracts with Competitive Companies.
Use Limited Build Strategy to Maximize Speed to Market and Minimize Investment
Risk. Competitive Companies will continue to pursue what we refer to as a
"limited build" strategy. Under this strategy, it will
- purchase and install class 5 switches in MDUs where Competitive
Companies has contracts with the owner of the MDU;
- locate its hub equipment (class 4 switches) in or near one of its MDU
sites or the central office facilities of incumbent local exchange
carriers; and
- lease unbundled network elements from the incumbent local exchange
carriers or resell services until growth justifies its ownership of
additional network assets.
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Once traffic volume justifies further investment, Competitive Companies may
then lease dark fiber or construct its own fiber network.
Competitive Companies believes that this limited build strategy offers a
number of economic benefits. First, the strategy allows Competitive Companies to
enter into a new market in a six-to nine-month time frame, less than half the
18-24 months generally required under the traditional "build first, sell later"
approach required before the Telecommunications Act established a framework for
CLECs to acquire unbundled network elements. Competitive Companies believes that
this limited build strategy has the additional advantage of reducing initial
capital requirements in each market, allowing Competitive Companies to focus its
initial capital resources on the critical areas of sales, marketing and
operations support systems, instead of on constructing extensive fiber optic
networks to each customer.
Competitive Companies is currently implementing this limited build strategy
in the three states where Competitive Companies is now operating: California,
Mississippi, and Alabama. It presently has switches with class 5 capabilities at
all MDU locations. Two locations also have switches with class 4 capabilities.
We lease high capacity circuits to connect the central office facilities of
incumbent local exchange carriers with its MDU switches. In California,
Competitive Companies is moving to the next stage of its limited build strategy,
and have begun marketing its Internet services and residential and business
program using agency agreements with an Internet service provider, another CLEC,
and independent agents. In December 1999 we received its CLEC certification in
California and its California tariffs were effective on January 12, 2000. During
the first and second quarters of 2000 we limited the number of residential and
business customer accounts that we would accept to allow Competitive Companies
to modify its order entry and billing systems to accommodate these types of
accounts in preparation for its rollout without significant problems. We
anticipate that the full implementation of residential and business local and
long distance services will commence in the third quarter of 2000. As the number
of its Internet subscribers increase, it will become cost effective to install
its own Internet servers which we anticipate will occur in 2000.
Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As
a result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
networks to highly concentrated downtown areas, which limits their ability to
provide service to customers in other attractive, but geographically dispersed,
markets. When we initially penetrate a market, we do so by signing a contract
with an MDU owner. This is done after completing an analysis of the property to
include size, class, occupancy turn-over rate, percent of occupancy, and credit
profile of tenants; rates charged by ILEC; tenant satisfaction with current
telecommunication providers; cable/satellite agreements; potential for passing
other carriers traffic; extent of local calling areas; and using FCC and
demographic data to determine concentration of potential business and
residential customers in the serviced area. We use this analysis, together with
estimates of the costs and potential benefits of addressing particular service
areas to:
- identify attractive markets;
- determine the optimal concentration of areas to be served; and
- develop its schedule for deploying and expanding its network.
This will enable Competitive Companies to address the most attractive
service areas throughout each of its target markets, such as suburban apartment
complexes, without having to construct its own fiber network to the customer
premises in each of these areas.
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Maximize Operating Margins by Emphasizing Facilities-Based Services.
Competitive Companies believes that by using its own facilities (class 5
switches at the MDUs and class 4 hub switches co-located at the MDU or with or
near the ILEC) to provide local exchange, local access, and long distance
service, we should generate significantly higher gross margins than we could
obtain by reselling services provided entirely on another carrier's facilities.
As a result, Competitive Companies focuses its marketing activities on areas
where we can serve customers through a direct connection using unbundled loops
or high capacity circuits connected to its facilities. We generally resell ILEC
services only to provide initial service until installation of the class 4
switch becomes cost effective and subsequently to provide comprehensive
geographical service coverage to customers with multiple sites where the
customer is physically connected to its switches and which can be addressed by
its facilities-based services. Competitive Companies will also resell ILEC
services to a few off-switch sites, which can be addressed only by reselling
these services.
Build Market Share by Focusing on Agent Program Sales. Competitive
Companies has developed and are presently implementing an agent program to sell
to business and residential customers. By using this approach, we hope to
rapidly increase its market share, particularly among small and medium-sized
businesses. Competitive Companies believes that ILECs have generally neglected
to target small and medium-sized business customers. Its sales management team
is experienced in managing a large number of agents in the telecommunications
and data networking industries.
Additionally, Competitive Companies believes that we can attract and retain
highly qualified sales agents by offering them the opportunity to:
- participate in the potential economic returns made available through
a results-oriented commission package and stock options;
- market a comprehensive set of products and services and customer care
options; and
- work with an experienced, success-proven, and customer service
oriented company.
Expand the use the Hartline Billing and Automated Back Office Systems. For
its MDU customers, its processes are presently automated. For its non-MDU
customers, Competitive Companies intends to automate most of the processes
involved in switching a customer to its networks. Its goal is to accelerate the
time between customer order and service installation, reduce overhead costs and
provide exceptional customer service. To achieve this goal, Competitive
Companies is continuing to develop and enhance the Hartline System to support
the growth of its operations into the non-MDU markets. Competitive Companies has
initially used its agency agreements and third party providers to electronically
bond with the incumbent local exchange carriers. Recently its staff personnel
completed the required training so we can now provide its own electronic bonding
to the applicable ILECs. Competitive Companies intends to have its experienced
information technology professionals modify the Hartline system as needed to
accommodate any required changes need to interface with the specific ILECs
system. With electronic bonding, we should be able to provide better customer
care since we can more readily pinpoint any problems with a customer's order.
Maintain Exceptional Customer Service. Competitive Companies may be the
only telecommunications service provider not using automated attendants and
voice mail in lieu of real people to answer its customer service lines. We plan
to maintain this human touch for quality customer service, communications and
problem solving for all of its MDU, business, and residential customers.
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Market Opportunity
U.S. Census Bureau data indicates that the United States communications services
market, including cable television, but excluding Internet access and content,
in 1997 totaled approximately $256 billion in annual revenue. Wireline
telecommunications services, other than Internet access and content, purchased
by residential users accounted for about 56%, or approximately $143 billion, of
the total U.S. market in 1997.
Competitive Companies focuses its primary sales efforts on MDUs with over 100
units. Competitive Companies believes that this market is significant, in that:
o There are over 60 million MDU doors (a single apartment unit, dormitory
room, or condominium unit) with each door represents one customer of an
MDU.
o Of these doors, over 20 million are in properties with over 100 units.
Traditional voice traffic accounted for the vast majority of residential
communications revenue in 1997, with local exchange and exchange access
accounting for over half of the total non-residential wireline
telecommunications market, excluding Internet access and content. Due to its
rapid growth, estimates of data and Internet services revenue are not as well
established as those relating to traditional voice traffic communications.
However, Competitive Companies believes that a significant market opportunity
exists for providers of both residential and non-residential Internet services.
Competitive Companies believes that the rapid opening of the local market to
competition, accelerated growth rates in local traffic related to increases in
Internet access, the desire for multiple suppliers by large businesses, and the
desire for "one-stop shopping" by consumers, presents an opportunity for new
entrants to achieve product differentiation and significant penetration into
this very large, established market. Success in this environment will, in the
opinion of management, depend primarily on speed-to-market, marketing
creativity, superior customer service, and a CLEC's ability to provide
competitively priced services rapidly and accurately and to issue concise,
accurate integrated billing statements.
Competitive Companies Telecommunications Services
We tailor its service offerings to meet the specific needs of the MDUs,
business, or residential customers in its target markets. Management believes
that its close contact with customers developed through its customer service
approach will enables Competitive Companies to tailor its service offerings to
meet customers' needs and to creatively package its services to provide
"one-stop shopping" solutions for those customers.
Local Exchange Services. Competitive Companies offers local telephone
services, including local dial tone as well as other features such as:
- call forwarding;
- call waiting;
- dial back;
- caller ID;
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- speed dialing;
- calling cards;
- three way calling;
- E-911; and
- voice mail.
By offering dial tone service, we also receive originating and terminating
access charges for interexchange calls placed or received by its subscribers.
Class 5 Switches/Shared Tenant Services. In MDUs, feature-enhanced class 5
switches are among the most cost efficient means of providing telephone
services. A class 5 switching system can be located within an MDU or office
building. In addition to the local exchange features mentioned above many of
these switches can also provide: wake-up call service, and music on hold. Under
shared tenant services provisions, Competitive Companies is also able to offer
its MDU customers a choice of long distance rates comparable to the major long
distance providers' programs.
Integrated Services Digital Network and High Speed Data Services. Beginning
in 2000, we expect to offer high-speed data transmission services, such as:
- wide area network interconnection, which are remote computer
communications systems that allow file sharing among geographically
distributed workgroups; wide area networks typically use links provided
by local telephone companies; and
- broadband Internet access, also known as "wideband," which allows large
quantities of data to be transmitted simultaneously.
These services may be provided via frame relay and dedicated point-to-point
connections. In order to provide these services, Competitive Companies intends
to use leased high capacity connections, such as multiple DS-1, DS-3, T1 or T3
connections, to medium- and large-sized business customers. Competitive
Companies may also employ DSL and/or ISDN connections over unbundled copper wire
connections to MDUs and smaller business users whose telecommunications
requirements may not justify such high capacity connections or which are located
in areas where T1 connections are not available.
Interexchange/Long Distance Services. Competitive Companies offers a full
range of:
- domestic long distance services, such as:
-- interLATA, which are calls that pass from one "Local Access and
Transport Area" or "LATA" to another, and such calls must be carried across the
LATA boundary by a long-distance carrier,
-- intraLATA, which is a call that falls within the local service area of
a single local telephone company, and
- international long distance services.
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These services include "1+" outbound calling, inbound toll free service,
and such services as calling cards, operator assistance, and conference calling.
Enhanced Internet Services. We presently offer dial-up Internet access
services via conventional modem connections, and content control software that
can be used to filter out selected materials, i.e., pornographic and hate
oriented. In 2000, we expect to offer dedicated, high-speed Internet access
services, including: ISDN, T1, and DSL. Dedicated access services are
telecommunications lines dedicated or reserved for use by particular customers.
Web Site Design and Hosting Services. We plan to offer web site design
services and Web site hosting on its own computer servers to provide customers
with a complete, easy to use key solution that gives them a presence on the
World Wide Web.
Sales And Customer Support
Competitive Companies offers an integrated package of local exchange, local
access, domestic and international long distance, enhanced voice, data, and a
full suite of Internet services to MDU resident, non-MDU residents and business
customers.
Its MDU market is addressed through the direct marketing efforts of its sales
and marketing team. Since contracting with an MDU is normally the first step in
penetrating a new geographical market, this approach provides Competitive
Companies with the opportunity to fully analyze both the MDU and the local
market (including both residential and business) for future potential prior to
commitment.
Unlike large corporate, government, or other institutional users, most small to
medium size businesses have no in-house telecommunications manager. Based on
management's previous experience, Competitive Companies believes that a bundled
package providing "one-stop shopping" solution offered through its professional
sales agent program and coupled with its exceptional customer service will have
a competitive advantage in capturing this type of customer's total
telecommunications traffic, and eventually produce a significant portion of its
revenue.
Sales and marketing approaches in the telecommunications market are
market-segment specific, and Competitive Companies believes the following are
the most effective approaches with respect to its three primary targeted market
segments:
- MDU customers---Competitive Companies uses direct sales, trade journal
advertising, referrals, and exhibitor trade shows. - Small/medium/large
businesses customers---Competitive Companies uses both direct sales and
professional sales agents that have established business relationships with the
prospective customer. In the future, will also use local media advertising.
- Residential customers---Competitive Companies uses primarily direct sales
including radio advertising, direct marketing and radio to ethnic groups, and
MDU customers moving from one of its shared tenant services locations.
Competitive Companies will also directly market wholesale Internet services to
other competitive local exchange carriers and long distance providers.
Information Systems
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Competitive Companies is continually enhancing its proprietary Hartline billing
and back office system and procedures for operations support and other functions
that Competitive Companies believes provides a significant competitive advantage
in terms of cost, processing large order volumes, and customer service. The
system is required to enter, schedule, provision, and track a customer's order
from the point of sale to the installation and testing of service and also
includes or interfaces with trouble management, inventory, billing, collection
and customer service systems. Its Hartline system presently provides all the
operational requirements to service its MDU customers and we anticipate that
Competitive Companies will be able to enhance and modify this system to
accommodate future changes in providing telecommunications and bundled services
to this market segment.
Order Management. Its sales team and agents will use its two in-house
developed customer web sites to enter customer orders on-site and over the
Internet. In the future, we plan for the sales team, agents and customer to be
able to monitor the status of the order as it progresses through the service
initiation process.
Provisioning Management. The existing systems currently employed by most
ILECs, CLECs and long distance carriers, which were developed prior to the
passage of the Telecommunications Act, generally require multiple entries of
customer information to accomplish order management, provisioning, switch
administration and billing. Upon certification as a CLEC in each state and prior
to its becoming electronically bonded to the ILECs existing systems, its
personnel must be trained by the respective ILEC for data entry into their
system. Until its personnel are trained and each interface with its system is
tested, Competitive Companies will use agency agreements with other CLECs and
available third party providers for this provisioning. This method will allow
Competitive Companies to rapidly penetrate a new market while simultaneously
training its personnel and making any necessary changes to its system to
accommodate electronic bonding with the ILEC.
External Interface. Several external interfaces are required to initiate
service for a customer. While some of these are automated via gateways from the
order management software, the most important interface, those to the ILEC, have
generally been accomplished via fax or e-mail. In an effort to make this process
more efficient, the ILECs have implemented electronic bonding between the
operations support system of a facilities-based CLEC and an ILEC. There is no
standard for the ILECs, instead each ILEC has their own system. This requires
the CLECs to modify their own system to interface with each ILEC as the CLEC
initially enters the ILECs territory. Third party services are presently
available that will provide the ILEC interfaces required to initiate service for
its customers.
Network Element Administration. Its Hartline system software provides for
administrating each element of its network. Its order management system and the
network element manager are integral parts of this system. This feature of the
Hartline system ensures data integrity and eliminate redundant data entry.
Customer Billing. Using the Hartline system, we provide its own in-house
billing for all of its MDU customers. As we expand its CLEC business into new
states the Hartline system will be modified to accommodate state regulatory and
tax requirements as Competitive Companies has done in California.
Billing Records. Local and intraLATA billing records are generated by its
switches to record customer calling activity. InterLATA billing records are
generated by the long distance carrier with whom Competitive Companies has a
resale agreement, to record customer calling activity. These records are entered
into its Hartline system along with other applicable charges for services
rendered in order to calculate and produce bills for its customers.
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Network Deployment
As of September 30, 2000, we were operational in 10 MDUs in California,
Mississippi, and Alabama using 6 class 5 switches and 2 class 4 switches with
class 5 features.
We expect to concentrate our installations in Alabama, Arizona, California,
Colorado, Florida, Mississippi, New Mexico, and Texas. The order and timing of
deployment may vary and will depend on a number of factors, including MDU
contracts acquired, management, the regulatory environment, our results of
operations, and the existence of specific market opportunities, such as
acquisitions. Competitive Companies may also elect not to deploy networks in
each such market.
In the majority of its targeted markets, we expect to initially deploy class 5
switches at MDUs. When class 5 switches have been deployed at multiple MDUs in
an area, we plan to collocate its class 4 switch and transmission equipment in
or near one of its MDU sites or the ILEC central offices. Over time, we plan to
expand its networks throughout selected metropolitan areas to address the
majority of the business and residential markets in each area.
Network Architecture
An important element of its limited build strategy is the installation of class
5 digital switches at the multi-dwelling unit sites we anticipate having under
contract. Switches are readily available from various manufacturers such as
Hitachi, Cortelco, and DTI that provide the features required for an MDU
customer. As more class 5 switches are brought on line, Competitive Companies
will be able to initiate its hub concept of having a class 4 switch (example:
Lucent Series 5ESS(R)-2000 digital switch or DTI DXC) and related equipment at a
central location in each market. As of December 31, 1999, we had deployed 8
switches to serve 10 MDUs. Four of these MDUs are in a California area that can
be supported by one hub switch. One of these switches is a class 4 switch that
can be used as a hub switch. Since Competitive Companies has received its
California CLEC certification and approved tariffs, we expect to implement its
hub switch concept this year.
Initially, Competitive Companies intends to lease local network trunking
facilities from the ILEC and/or one or more CLECs in order to connect its
switches to major ILEC central offices serving the central business district and
outlying areas of business concentrations in each market. The switch will also
be connected to ILEC tandem switches and certain interexchange carrier
points-of-presence, the equivalent of a local phone company's central office. To
access the largest number of customers possible without having to lay fiber to
each of their premises, we also intend to locate access equipment such as
integrated digital loop carriers and related equipment in each of the ILEC
central offices to which we connect.
As each residential and business customer is signed up, service will be
initially provided under CLEC resale of ILEC services. As the customer base in a
given area grows, service will be provided by leasing unbundled loops from the
ILEC to connect its integrated digital loop carriers located near to or in the
serving central office to the customer premise equipment. For large business, or
for numerous customers located in large buildings, it may be more cost-effective
for Competitive Companies to install class 5 switches or perhaps a wireless
local loop leased from one of the emerging wireless CLECs, to connect the
customer(s) to the its network. In either case, Competitive Companies will
locate its integrated digital loop carriers or other equipment in the customer's
building.
Although Competitive Companies will initially lease its local network
transmission facilities, we plan to replace leased capacity with its own fiber
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optic facilities as and when we experience sufficient traffic volume growth
between its switch and specific ILEC central offices or as other factors make
these arrangements more attractive.
Implementation Of Services
Shared tenant services. To offer shares tenant services to multi-dwelling
unit customers, CCI Residential Services must sign a contract with the apartment
owner. These are multi-year contracts ranging from 10 to 20 years. They provide
for the owner to share in a percentage of the revenue we receive from servicing
his complex. The percentage receive may vary for 0% to 11%, based on the total
revenue received, the types of services provided, the term of the contract and
other negotiated factors. If the complex is being built, we must plan for, have
approved, and install underground cabling. If the complex is already built, we
must survey the cabling needs and negotiate the use of the cable with the owner.
We must also secure state approval to conduct business in the state, establish
service from CCI if CCI is already a CLEC in the state or negotiate rates with
the ILEC until CCI is certified.
CLEC services. To offer CLEC services in a market, we generally must secure
certification from the state regulator and typically must file tariffs or price
lists for the services that it will offer. The certification process varies from
state to state; however, the fundamental requirements are largely the same.
State regulators require new entrants to demonstrate that they have secured
adequate financial resources to establish and maintain good customer service.
New entrants must also show that they possess the knowledge and ability required
to establish and operate a telecommunications network. Competitive Companies has
made such demonstrations in California and Mississippi, where Competitive
Companies has obtained certificates to provide local exchange and intrastate
toll services. Competitive Companies intends to file similar applications in the
near future in other states as we contract for MDU installations.
Before providing local service, a new entrant must negotiate and execute an
interconnection agreement with the ILEC. While such agreements can be voluminous
and may take months to negotiate, most of the key interconnection issues have
now been thoroughly addressed and commissions in most states have ruled on
arbitrations between the ILECs and new entrants. However, interconnection rates
and conditions may be subject to change as the result of future commission
actions or other changes in the regulatory environment. Under a recent United
States Supreme Court ruling, new entrants may adopt either all or portions of an
interconnection agreement already entered into by the ILEC and another carrier.
Such an approach will be selectively adopted by Competitive Companies to enables
Competitive Companies to enter markets quickly while at the same time preserving
its right to replace the adopted agreement with a customized interconnection
agreement that can be negotiated once service has already been established.
While such interconnection agreements include key terms and prices for
interconnection, a significant joint implementation effort must be made with the
ILEC in order to establish operationally efficient and reliable traffic
interchange arrangements. Such interchange arrangements must include those
between the new entrant's network and the facilities of other service providers
as well as public service agencies.
Competitive Companies has entered into an interconnection agreement with
BellSouth which became effective October 1, 1996, and covers nine states
including: Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North
Carolina, South Carolina, and Tennessee. In February 2000 we entered into
interconnection agreements with PacBell and GTE in California and are now
operating as a CLEC in California. In Mississippi we must upgrade its class 5
switch to a class 4 switch and have its tariffs approved in order to commence
operating as a CLEC. Competitive Companies intends to use proceeds from its
offering to acquire the upgrades to the equipment.
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After the initial implementation activities are completed in a market, we
follow an on-going capacity management plan to ensure that adequate quantities
of network facilities, such as interconnection trunks are in place, and a
contingency plan must be devised to address spikes in demand caused by events
such as a larger-than-expected customer sale in a relatively small geographic
area.
Regulation
Its telecommunications services business is subject to federal, state and local
regulation.
Federal Regulation
The FCC regulates interstate and international telecommunications services,
including the use of local telephone facilities to originate and terminate
interstate and international calls. We provide such services on a common carrier
basis. The FCC imposes certain regulations on common carriers such as the ILECs
that have some degree of market power. The FCC imposes less regulation on common
carriers without market power including, to date, CLECs like Competitive
Companies. The FCC requires common carriers to receive an authorization to
construct and operate telecommunications facilities, and to provide or resell
telecommunications services, between the United States and international points.
Under the Telecommunications Act, any entity, including cable television
companies and electric and gas utilities, may enter any telecommunications
market, subject to reasonable state regulation of safety, quality and consumer
protection. Because implementation of the Telecommunications Act is subject to
numerous federal and state policy rulemaking proceedings and judicial review
there is still uncertainty as to what impact such legislation will have on
Competitive Companies.
The Telecommunications Act is intended to increase competition. The act
opens the local services market by requiring ILECs to permit interconnection to
their networks and establishing ILEC obligations with respect to:
Reciprocal Compensation. Requires all local exchange carriers to
complete calls originated by competing local exchange carriers under reciprocal
arrangements at prices based on tariffs or negotiated prices.
Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or conditions. In
addition, ILECs are required to offer wholesale versions of all retail services
to other telecommunications carriers for resale at discounted rates, based on
the costs avoided by the ILEC in the wholesale offering.
Interconnection. Requires all ILECs and CLECs to permit their
competitors to interconnect with their facilities. Requires all ILECs to permit
interconnection at any technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost, which may include a reasonable
profit. At the option of the carrier seeking interconnection, collocation of the
requesting carrier's equipment in the ILECs' premises must be offered, except
where an ILEC can demonstrate space limitations or other technical impediments
to collocation.
Unbundled Access. Requires all ILECs to provide nondiscriminatory
access to unbundled network elements including, network facilities, equipment,
features, functions, and capabilities, at any technically feasible point within
their networks, on nondiscriminatory terms, at prices based on cost, which may
include a reasonable profit.
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Number Portability. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal
access to competing providers of telephone exchange service and toll service,
and to provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable dialing
delays.
Access to Rights-of-Way. Requires all ILECs and CLECs to permit
competing carriers access to poles, ducts, conduits and rights-of-way at
regulated prices.
ILECs are required to negotiate in good faith with carriers requesting any or
all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
In August 1996, the FCC released a decision establishing rules implementing the
ILEC interconnection obligations described above. On July 18, 1997, the Eighth
Circuit vacated certain portions of this decision and narrowly interpreted the
FCC's power to prescribe and enforce rules implementing the Telecommunications
Act. On January 25, 1999, the United States Supreme Court reversed the Eighth
Circuit decision and reaffirmed the FCC's broad authority to issue rules
implementing the Telecommunications Act, although it did vacate a rule
determining which network elements the incumbent local exchange carriers must
provide to competitors on an unbundled basis. We, however, will only lease the
basic unbundled network elements from the ILEC and therefore we do not expect
reconsideration of the unbundling rules to have an adverse effect on its limited
build strategy.
Nevertheless, the FCC likely will conduct additional rulemaking proceedings to
conform to the Supreme Court's interpretation of the law, and these proceedings
may result in further judicial review.
The Telecommunications Act codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that replace prior
antitrust restrictions that prohibited the regional Bell operating companies
from providing long distance services and engaging in telecommunications
equipment manufacturing. The Telecommunications Act permitted the regional Bell
operating companies to enter the out-of-region long distance market immediately
upon its enactment. Further, provisions of the Telecommunications Act permit a
regional Bell operating company to enter the long distance market in its
in-region states if it satisfies several procedural and substantive
requirements, including:
- obtaining FCC approval upon a showing that the regional Bell operating
company has entered into interconnection agreements or, under some
circumstances, has offered to enter into such agreements in those
states in which it seeks long distance relief;
- the interconnection agreements satisfy a 14-point "checklist" of
competitive requirements; and
- the FCC is satisfied that the regional Bell operating company's entry
into long distance markets is in the public interest.
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To date, several petitions by regional Bell operating companies for such entry
have been denied by the FCC, and none have been granted. However, it is likely
that additional petitions will be filed in 2000 and it is possible that regional
Bell operating companies may receive approval to offer long distance services in
one or more states. This may have an unfavorable effect on its business.
Competitive Companies is legally able to offer its customers both long distance
and local exchange services, which the regional Bell operating companies
currently may not do. This ability to offer "one-stop shopping" gives
Competitive Companies a marketing advantage that we would no longer enjoy. See
"Competition".
On May 8, 1997, the FCC released an order establishing a significantly expanded
federal universal service subsidy regime. For example, the FCC established new
subsidies for telecommunications and information services provided to qualifying
schools and libraries with an annual cap of $2.25 billion and for services
provided to rural health care providers with an annual cap of $400 million. The
FCC also expanded the federal subsidies for local exchange telephone services
provided to low-income consumers. Providers of interstate telecommunications
service, such as Competitive Companies must pay for a portion of these programs.
Its share of these federal subsidy funds will be based on its share of certain
defined telecommunications end user revenues. Currently, the FCC is assessing
such payments on the basis of a provider's revenue for the previous year. The
FCC announced that effective July 1, 1999, it revised its rules for subsidizing
service provided to consumers in high cost areas, which may result in further
substantial increases in the overall cost of the subsidy program. Several
parties have appealed the May 8, 1999 order. Such appeals have been consolidated
and transferred to the United States Court of Appeals for the Fifth Circuit
where they are currently pending.
Competitive Companies is currently unable to quantify the amount of subsidy
payments that Competitive Companies will be required to make or the effect that
these required payments will have on its financial condition.
Under authority granted by the FCC, Competitive Companies will resell the
international telecommunications services of other common carriers between the
United States and international points. In connection with such authority, its
subsidiary, Competitive Communications, Inc., has filed tariffs with the FCC
stating the rates, terms and conditions for its international services.
With respect to its domestic service offerings, Competitive Communications, Inc.
has filed tariffs with the FCC stating the rates, terms and conditions for its
interstate services. Its tariffs are generally not subject to pre-effective
review by the FCC, and can be amended on one day's notice. Its interstate
services are provided in competition with interexchange carriers and, with
respect to access services, the ILECs. With limited exceptions, the current
policy of the FCC for most interstate access services dictates that ILECs charge
all customers the same price for the same service. Thus, the ILECs generally
cannot lower prices to those customers likely to contract for their services
without also lowering charges for the same service to all customers in the same
geographic area, including those whose telecommunications requirements would not
justify the use of such lower prices. The FCC may, however, alleviate this
constraint on the ILECs and permit them to offer special rate packages to very
large customers, as it has done in a few cases, or permit other forms of rate
flexibility. The FCC has adopted some proposals that significantly lessen the
regulation of ILECs that are subject to competition in their service areas and
provide such ILECs with additional flexibility in pricing their interstate
switched and special access on a central office specific basis; and is
considering expanding such flexibility.
ILECs around the country have been contesting whether the obligation to pay
reciprocal compensation to competitive local exchange carriers should apply to
local telephone calls from an ILEC's customers to Internet service providers
served by competitive local exchange carriers. The ILECs claim that this traffic
is interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. Competitive local exchange
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carriers have contended that the interconnection agreements provide no exception
for local calls to Internet service providers and reciprocal compensation is
therefore applicable. Currently, over 25 state commissions and several federal
and state courts have ruled that reciprocal compensation arrangements do apply
to calls to Internet service providers, and no jurisdiction has ruled to the
contrary. Certain of these rulings are subject to appeal. Additional disputes
over the appropriate treatment of Internet service provider traffic are pending
in other states.
On February 26, 1999, the FCC released a Declaratory Ruling determining that
Internet service provider traffic is interstate for jurisdictional purposes, but
that its current rules neither require nor prohibit the payment of reciprocal
compensation for such calls. In the absence of a federal rule, the FCC
determined that state commissions have authority to interpret and enforce the
reciprocal compensation provisions of existing interconnection agreements, and
to determine the appropriate treatment of Internet service provider traffic in
arbitrating new agreements. The FCC also requested comment on alternative
federal rules to govern compensation for such calls in the future. In response
to the FCC ruling, some regional Bell operating companies have asked state
commissions to reopen previous decisions requiring the payment of reciprocal
compensation on Internet service provider calls. This is the case with
BellSouth. In 1999 we modified its agreement with BellSouth to eliminate the
payment of reciprocal compensation on Internet service provider calls.
Competitive Companies anticipates that Internet service providers will be among
its target customers, and adverse decisions in other state proceedings could
limit its ability to service this group of customers profitably. Competitive
Companies will limit the switch capacity used for Internet service provider
lines to 20%. In addition, given the uncertainty as to whether reciprocal
compensation should be payable in connection with calls to Internet service
providers, we recognizes such revenue only when realization of it is certain,
which in most cases will be upon receipt of cash.
State Regulation
The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other pro-competitive measures.
State regulatory agencies have regulatory jurisdiction when its facilities and
services are used to provide intrastate services. A portion of its current
traffic may be classified as intrastate and therefore subject to state
regulation. We expect to offer more intrastate services, including intrastate
switched services, as its business and product lines expand and state
regulations are modified to allow increased local services competition. For
other than shared tenant services, in order to provide intrastate services, we
generally must obtain a certificate of public convenience and necessity from the
state regulatory agency and comply with state requirements for
telecommunications utilities, including state tariffing requirements.
Similar to the FCC, state agencies require Competitive Companies to file
periodic reports, pay various fees and assessments, and comply with rules
governing quality of service, consumer protection, and similar issues. Although
the specific requirements vary from state to state, they tend to be more
detailed than the FCC's regulation because of the strong public interest in the
quality of basic local exchange service. Competitive Companies intends to comply
with all applicable state regulations, and as a general matter do not expect
that these requirements of industry-wide applicability will harm its business.
However, Competitive Companies cannot assure you that the imposition of new
regulatory burdens in a particular state will not affect the profitability of
its services in that state.
49
<PAGE>
Local Regulation
Its networks are subject to numerous local regulations such as building codes
and licensing. Such regulations vary on a city-by-city and county-by-county
basis. If we decide in the future to install its own fiber optic transmission
facilities, Competitive Companies will need to obtain rights-of-way over private
and publicly owned land. There can be no assurance that such rights-of-way will
be available to Competitive Companies on economically reasonable or advantageous
terms.
Competition
The telecommunications industry is highly competitive. Competitive Companies
believes that the principal competitive factors affecting its business will be
pricing levels and clear pricing policies, customer service, accurate billing
and, to a lesser extent, variety of services. Its ability to compete effectively
will depend upon its continued ability to maintain high quality, market-driven
services at prices generally equal to or below those charged by its competitors.
To maintain its competitive posture, Competitive Companies believes that we must
be in a position to reduce its prices in order to meet reductions in rates, if
any, by others. Any such reductions could adversely affect its business
performance. Many of its current and potential competitors have financial,
personnel and other resources, including brand name recognition, substantially
greater than ours, as well as other competitive advantages over Competitive
Companies.
In each of the markets we target, Competitive Companies will compete principally
with the ILEC serving that area, such as PacBell, BellSouth, Southwestern Bell,
or COMPETITIVE COMPANIES WEST. Competitive Companies believes the regional Bell
operating companies' primary agenda is to be able to offer long distance service
in their service territories. The independent telephone companies have already
achieved this goal with good early returns.
Many experts expect the regional Bell operating companies to be successful in
entering the long distance market in a few states sometime in 2000. Competitive
Companies believes the regional Bell operating companies expect to offset share
losses in their local markets by capturing a significant percentage of the
in-region long distance market, especially in the residential segment where the
regional Bell operating companies' strong regional brand names and extensive
advertising campaigns may be very successful.
As a recent entrant in the integrated telecommunications services industry,
Competitive Companies has not achieved and do not expect to achieve a
significant market share for any of its services. In particular, the ILECs have
long-standing relationships with their customers; have financial,
technical and
marketing resources substantially greater than ours; have the potential to
subsidize competitive services with revenues from a variety of businesses; and
currently benefit from certain existing regulations that favor the ILECs over
Competitive Companies in certain respects. While recent regulatory initiatives,
which allow CLECs such as its subsidiary, Competitive Communications, to
interconnect with ILEC facilities, provide increased business opportunities for
Competitive Companies, such interconnection opportunities have been and likely
will continue to be accompanied by increased pricing flexibility for and
relaxation of regulatory oversight of the ILECs.
ILECs have long-standing relationships with regulatory authorities at the
federal and state levels. While recent FCC administrative decisions and
initiatives provide increased business opportunities to telecommunications
providers such as Competitive Companies, they also provide the ILECs with
increased pricing flexibility for their private line and special access and
50
<PAGE>
switched access services. In addition, with respect to competitive access
services as opposed to switched access services, the FCC recently proposed a
rule that would provide for increased ILEC pricing flexibility and deregulation
for such access services either automatically or after certain competitive
levels are reached. If the ILECs are allowed by regulators to offer discounts to
large customers through contract tariffs, engage in aggressive volume and term
discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, the income of
competitors to the ILECs, including Competitive Companies, could be harmed. If
future regulatory decisions afford the ILECs increased access services pricing
flexibility or other regulatory relief, such decisions could also harm
competitors to the ILEC, including Competitive Companies.
Competitive Access Carriers/Competitive Local Exchange
Carriers/Interexchange Carriers/ Other Market Entrants. We also face, and
expects to continue to face, competition from other current and potential market
entrants, including long distance carriers seeking to enter, reenter or expand
entry into the local exchange market such as AT&T, MCI WorldCom, and Sprint, and
from other CLECs, resellers of local exchange services, competitive access
providers, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators and private networks built by large end
users. In addition, a continuing trend toward consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, as well as the development of new technologies,
could give rise to significant new competitors to Competitive Companies. For
example, WorldCom acquired MFS Communications in December 1996, acquired another
CLEC, Brooks Fiber Properties, Inc. in 1997, and subsequently merged with MCI.
AT&T acquired Teleport Communications Group Inc., a CLEC, and
TeleCommunications, Inc., a cable, telecommunications and high-speed Internet
services provider. Ameritech Corporation agreed to merge with SBC
Communications; Bell Atlantic agreed to merge with GTE Corporation; and
COMPETITIVE COMPANIES West agreed to merge with Qwest. These types of
consolidations and strategic alliances could put Competitive Companies at a
competitive disadvantage.
The Telecommunications Act includes provisions which impose certain
regulatory requirements on all local exchange carriers, including competitors
such as Competitive Companies, while granting the FCC expanded authority to
reduce the level of regulation applicable to any or all telecommunications
carriers, including ILECs. The manner in which these provisions of the
Telecommunications Act are implemented and enforced could harm Competitive
Companies' ability to successfully compete against ILECs and other
telecommunications service providers.
The changes in the Telecommunications Act radically altered the market
opportunity for traditional competitive access providers and CLECs. Due to the
fact that most existing competitive access providers/CLECs initially entered the
market providing dedicated access in the pre-1996 era, these companies had to
build a fiber infrastructure before offering services. Switches were added by
most competitive access providers/CLECs in the last three years to take
advantage of the opening of the local market. With the Telecommunications Act
requiring unbundling of the local exchange carrier networks, competitive access
providers/CLECs will now be able to more rapidly enter the market by installing
switches and leasing trunk and loop capacity until traffic volume justifies
building facilities. New CLECs will not have to replicate existing facilities
and can be more opportunistic in designing and implementing networks.
A number of CLECs have entered or announced their intention to enter into
one or more of the same markets as Competitive Companies. Competitive Companies
believes that not all CLECs however, are pursuing the same target customers as
Competitive Companies. Demographically, business customers are divided into
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<PAGE>
three segments: small, medium and large. Targeted cities are divided into three
segments by population: Tier 1, Tier 2 and Tier 3. As would be expected, each
CLEC may focus on different combinations of primary and secondary target
customers.
Competitive Companies has chosen to focus primarily on MDUs, residential,
and small to medium size business customers in large Tier 1 and medium Tier 2
markets. To help distinguish Competitive Companies from competitors who have
adopted a similar strategy, Competitive Companies offer potential customers
"one-stop shopping" services through a single point of contact---either the
agent with whom Competitive Companies has worked in the past or one of its
marketing staff. In addition, Competitive Companies is actively pursuing MDU
locations throughout all of its target markets which, in combination with its
limited build strategy, is expected to allow Competitive Companies to access its
markets and provide a greater array of services more quickly than if we were to
use a traditional build approach.
Competitive Companies believes the major interexchange carriers, such as
AT&T, MCI WorldCom and Sprint, have a two-pronged strategy:
- keep the regional Bell operating companies out of in-region long
distance as long as possible, and
- develop facilities-based and unbundled local service
Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average turnover rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. We expect
to increasingly face competition from companies offering long distance data and
voice services over the Internet. Such companies could enjoy a significant cost
advantage because they do not currently pay carrier access charges or universal
service fees.
Data/Internet Service Providers. The Internet services market is highly
competitive, and we expect that competition will continue to intensify. Its
competitors in this market will include other Internet service providers, other
telecommunications companies, online services providers and Internet software
providers. Many of these competitors have greater financial, technological and
marketing resources than those available to Competitive Companies.
Competition from International Telecommunications Providers. Under the
World Trade Organization agreement on basic telecommunications services, the
United States and 72 other members of the World Trade Organization committed
themselves to opening their respective telecommunications markets and/or foreign
ownership and/or to adopting regulatory measures to protect competitors against
anti-competitive behavior by dominant telecommunications companies. Although
Competitive Companies believes that this agreement could provide Competitive
Companies with significant opportunities to compete in markets that were not
previously accessible and to provide more reliable services at lower costs than
we could have provided prior to implementation of this agreement, it could also
provide similar opportunities to its competitors and facilitate entry by foreign
carriers into the U.S. market. There can be no assurance that the
pro-competitive effects of the World Trade Organization agreement will not harm
its business, financial condition and results of operations or that members of
the World Trade Organization will implement the terms of this agreement.
Employees
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As of September 30, 2000, Competitive Companies had 8 full-time and 4 part-time
employees. Competitive Companies believes that its future success will depend on
its continued ability to attract and retain highly skilled and qualified
employees while maintaining high employee productivity.
None of its employees are currently represented by a collective bargaining
agreement. Competitive Companies believes that we enjoy good relationships with
its employees.
Legal Proceedings
Competitive Companies' subsidiary is a defendant in Personal Communications
Spectrum V vs. Competitive Communications, Inc., American Arbitration
Association Case No 72 Y 181 1033 99. A federal receiver has been appointed for
Personal Communications. The receiver is seeking payment of fees claimed due
from Competitive Communications. Any adverse decision would cause Competitive
Companies substantial financial harm, seriously damaging its business and
operations as a going concern.
Facilities
Competitive Companies is headquartered in Riverside, California, where we lease
approximately 3,100 square feet of offices and warehouse space. We also lease
minimal space (from 100 to 200 square feet) for its telecommunications equipment
at each of the MDUs where Competitive Companies has systems installed.
Competitive Companies believes that its leased facilities are adequate to meet
its current needs. However, as we begin to deploy additional systems and build
its networks, Competitive Companies will need to increase its headquarters
office space, add equipment rooms at newly contracted MDUs, and contract for
co-location of switching facilities at ILECs. We anticipate such facilities are
available to meet its development and expansion needs in existing and projected
target markets for the foreseeable future.
COMPETITIVE COMPANIES' MANAGEMENT
Competitive Companies' directors, executive officers and directors as of
September 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE SERVED SINCE
<S> <C> <C> <C>
David Kline II 38 Chairman, C.E.O, President, 1985
C.O.O. & Director
Larry Halstead 56 Sec./Treas., C.F.O. &
Director 1996
Michael Godfree 59 V.P., Business Development
& Director 1997
Jerald Woods 51 V.P. & Director 1997
</TABLE>
The following is a brief summary of the business experience of these
individuals:
53
<PAGE>
David "DK" Kline II, is a co-founder of the company and has served as president,
chief operating officer and director since inception. In December 1999 he became
the chairman of the board and chief executive officer on the death of his
father, David Kline, Sr., who was a co-founder of the company and served as
Chairman and Chief Executive Officer from its founding in 1998. From 1996 to the
present DK has also served as the president of Competitive Communications, Inc.,
its wholly owned subsidiary, and also commenced serving as president of CCI
Residential Services, Inc. upon its incorporation in January 2000. From 1992 to
1996, DK served as president of Western Telephone & Television, Riverside,
California. This was the forerunner company of Competitive Communications, Inc.
Western Telephone & Television developed the concept of bundling telephone and
cable television service for multi-dwelling units. DK is a factory certified
technician on all the telephone systems, voice mail systems and cable headends
the company uses. DK co-authored and programmed its proprietary billing system.
He has engineered and managed the installation of every residential telephone
and cable system in its portfolio. DK is knowledgeable in the various
interconnections and services supplied by the ILECs. He negotiates for the
company the transport and usage fees with both the LEC and the IXC. On system
installations, he coordinates the project with the contractors, property owners
and the on-site lease management. DK has a Bachelor of Arts in Chemistry from
California Lutheran University, 1984.
Larry Halstead has been Secretary/Treasurer, Chief Financial Officer and
Director of the company since inception. He has also served in the same capacity
for Competitive Communications, Inc. since 1996 and of CCI Residential Services,
Inc. since January 2000. From 1994 to 1996 he was Executive Consultant Sales and
Marketing for Integrated Cargo Management Systems, Inc., of San Antonio, Texas,
where he was responsible for designing, planning, developing, and marketing a
satellite and cellular based cargo tracking and monitoring system. His
background includes over 30 years in high technology based industries including
computers and telecommunications, strategic business planning and development,
sales and marketing, regulatory filing, logistics, and system build-out. From
1972 through 1994 he worked for I/O Computing, Long Beach, California, as Sales
and Data processing Manager; EECO, Inc. Hotel Systems Division, Santa Ana,
California, as Marketing Service Manager and Planning Manager; for Standard
Logic, Inc., Corona, California, as Marketing Vice President; Compu-Source, El
Toro, California, as Vice President Sales & Marketing and Partner; and The
Wellington Financial Group, San Antonio, Texas, as Regional Director. While at
EECO, Inc. and Standard Logic, Inc. he spearheaded the development of the first
system interface between a hotel "private" telephone switch and a point-of-sale
system with the hotel front desk computer system allowing for automated and
immediate posting of charges to the guest's folio. From 1966 to 1997, Mr.
Halstead held a number of command and other key positions in the U.S. Army and
the Army Reserve, achieving the rank of Colonel upon retirement in 1997. From
1988 to 1991, he was Deputy Chief of Staff for Logistics for a command covering
most of the Western United States. From 1994 to 1997, as the Army's Emergency
Preparedness Liaison Officer for Texas, he was responsible for coordinating
F.E.M.A. and state emergency requirements with the Texas Adjutant General and
the F.E.M.A. Regional Director. Mr. Halstead received a Bachelor of Science in
Biology from the University of California, Irvine, 1977. He is also a graduate
of Air War College in 1987, and is certified as a Logistician by the U.S. Army.
Michael Godfree has been Vice President, Business Development and Director of
the company since 1998. He has over fourteen years in the telecommunications
industry. Since 1995 Mr. Godfree has been president and a major stockholder of
APMSAFE.COM (American Privacy Management, Inc.), a company that develops and
sells out of a patented algorithm, encryption products and public key
infrastructure solutions for privacy problems on the electronic highway. From
1986 to 1995 he provided telecommunications consulting services to the
telecommunications industry through his company, TSC. While at TSC he provided
consultation in Federal Communications Commission filing and licensing
54
<PAGE>
requirements, and in both wireless and wireline infrastructure development. In
1984 he founded, and from 1984 to 1986, he was president of American National
Cellular which was one of the initial private companies in the United States to
offer individuals equity ownership in cellular phone infrastructure. Mr. Godfree
was educated at Newbattle Abbey College, Dalkeith, Edinburgh, Scotland;
Occidental College, Los Angeles; and the University of Sussex, Brighton,
England, from which he holds a Bachelor of Arts Degree in Law.
Jerald Woods has been Vice President and Director of the company since 1998.
From 1994 to the present he has also been an officer and director of APMSAFE.COM
(American Privacy Management, Inc.), a company which has developed an encryption
technology for the Internet. From 1988 to 1994 he was chairman and director for
American Digital Communications, Inc. a public company which was involved in the
build out of 220 and 800 Mega Hertz systems. Mr. Woods has over fourteen years
of telecommunications experience, and has co-founded five public companies. From
1984 to 1989 he hosted and produced "Breakthroughs in Technology", an investment
program specializing in high technology companies, which aired for thirty
minutes, five-days per week on Financial News Network (FNN) prior to FNN being
acquired by CNBC.
Election of Directors
Its Bylaws provide that the board of directors shall consist of five members
until changed by amendment to the articles of incorporation or by amendment to
the applicable section of the bylaws, adopted by the majority of the voting
power of the corporation. The board of directors voted to delay the filling of
the board position vacated by David Kline, Sr. on his death in December 1999
until the annual stockholders' meeting in 2000.
Executive Compensation
The following table sets forth summary information concerning
the compensation received for services rendered to Competitive
Companies during the years ended December 31, 1999 and 1998,
respectively by the Chief Executive Officer. No other executive
officers received aggregate compensation during its last fiscal year
which exceeded, or would exceed on an annualized basis, $100,000. Other
annual compensation consists of health and life insurance premiums and
automobile lease payments.
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Name and All Other Annual
Principal Position Year Salary (1) Bonus Compensation
------------------------------------- --------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
David Kline, Sr. 1999 $ 66,724 $ - $ 11,506
Chief Executive Officer $
David Kline II
President 1999 $ 8800 $ 4954
Chief Executive Officer & 2000 $ 1022 $ 4270
President
</TABLE>
(1) Includes other personal items paid on behalf of Mr. Kline, Sr.
55
<PAGE>
On December 23, 1999, the Board of Directors appointed David Kline II to assume
the duties of Chairman of the Board and Chief Executive Officer of Competitive
Companies, Inc. This was in addition to his duties as President. This
appointment resulted from the sudden death of David Kline, Sr. on December 23,
1999.
Employment Agreements
Competitive Companies has entered into five-year employment agreements with its
president and secretary which require initial annual base salary of
approximately $77,000 and $68,000 respectively, and unless earlier terminated,
are subject to automatic extension for an additional period of two years. The
officers' annual base salaries will be increased to $130,000 and $115,000,
respectively if Competitive Companies is able to raise $1,000,000 of investment
proceeds.
In addition to their annual base salary, both of the executives are entitled to
amounts under an executive bonus plan in any fiscal year in which its earnings
before taxes and charitable contributions, called PT-PC, is $1,000,000 or more.
Under the plan, 6% of the PT-PC is available for executive officers and an
additional 6% for non-executive officers to be paid as cash bonuses no less
often than annually. Through December 31, 1999, no amounts have been awarded
under this plan.
In addition to the base salary, the president and secretary shall be entitled
during the employment period to receive such additional benefits as may be
provided for them or to which they may become entitled because his position,
tenure, salary, age, health or other qualifications make them eligible to
participate. Additional benefits means
o Participation in bonus and incentive compensation plans or pools, stock
option, bonus, award or purchase plans, retirement plans, and other
benefit plans, if any;
o Life, health, medical, dental, accident, and other personal insurance
coverage provided for employees or their dependents;
o Directors' and officers' liability insurance coverage and charter or
bylaw provisions or contracts providing for indemnification of
corporate personnel or elimination or limitation of their liabilities
as such;
o Automobile or related compensation per guidelines approved by the
board of directors;
o Use of its property and facilities and other perquisites of employment;
o paid vacation, leave or holidays;
o Any and all other compensation, benefits and perquisites of employment
with Competitive Companies, if any, other than base salary; and
o Reasonable moving and personal expenses in connection with company
required relocations.
The employment of the president and secretary with the company terminates on the
date of the occurrence of any of the following events:
o Expiration of the employment period
o The death of the president or secretary, respectively
o Fifteen days after the date on which Competitive Companies has given
the president or secretary written notice of the termination of
employment by reason of permanent physical or mental incapacity that
prevents him from performing the essential elements of his respective
56
<PAGE>
position for a period of six consecutive months or more as determined
by a medical professional selected by the company, in its sole
discretion, and by the company acting in good faith
o After five days' written notice to the president or secretary for cause, which
shall include only the following:
o Intentional misconduct or gross negligence by the president or
secretary in the course of employment
o The commission or perpetration by the president or secretary of any
fraud against Competitive Companies or others in connection with his
employment
o The commission by the president or secretary of such acts or
dishonesty, fraud or misrepresentation or other acts of moral turpitude
as would prevent the effective performance of his duties
o Knowingly causing or permitting Competitive Companies to violate any
law, which violation shall have a material effect on Competitive
Companies
o The failure to perform, breach, or violation by the president or
secretary of any of his material obligations under the agreement which
continues after fifteen days' written notice has been given to him by
the company specifying the failure to perform, breach, or violation
o Upon at least sixty days' advance written notice by the president or
secretary
o Upon at least sixty days' advance written notice by the company based
solely on concurrence of a minimum of 4/5th of the board of directors
In the event the president's or secretary's employment under the employment
agreement is terminated for the reasons set forth in bullet points 3 or 6 above,
we shall pay the president or secretary an amount equal his then base salary
multiplied by twenty-four months and shall continue to provide his medical
insurance for a period of twenty four months following such termination.
Upon any termination
o The president's or secretary's estate in the case of death shall
immediately be paid all accrued base salary which would otherwise be
due and payable and accrued vacation pay, all to the date of
termination.
o Benefits accrued under its benefit plans, if any, will be paid in
accordance with such plans.
o Bonuses shall be paid at the end of the fiscal year if earned, with the
amount prorated by the number of days during the fiscal year the
president or secretary was employed.
The president or secretary have agreed that during the term of their respective
employment, they will not engage, directly or indirectly, or be interested as
director, officer, partner, consultant, principal, shareholder, or otherwise in
any firm, corporation, or other entity in the business of developing, producing,
distributing, or selling any product competitive with its products in any
geographic area in which we engage in the same or similar business without its
express written consent.
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<PAGE>
Compensation of Directors
Competitive Companies has not agreed to pay its directors who are not officers
or employees any stated salary, but by resolution of the board a fixed sum and
expense of attendance, if any, may be allowed for attendance at each regular and
special meeting of the board or its committees. On the date of appointment to
the board, each board member or employee board member shall be granted an option
to purchase at the fair market value an aggregate of 5,000 shares of Class A
common stock. The option shall vest and become exercisable at the rate of 20%
per year after the expiration of the first year following the date on which the
option is granted and shall be exercisable in full only after the expiration of
five 5 years following the date the option was granted.
Executive Bonus Plan (ExBP)
The ExBP Plan for Competitive Communications was adopted in April 1996. The plan
is intended to enables the company to recruit, reward, retain and motivate
employees and to attract and retain outside directors, agents and consultants on
a basis competitive with industry practices. Under the plan, 6% of
pre-tax-pre-charitable contribution (PT-PC-) for executive officers and an
additional 6% PT-PC for non-executive officers will be paid as cash bonuses no
less often than annually.
The ExBP Plan will be administered by the board of directors or the compensation
committee of the board of directors. The committee has sole authority and
discretion under the ExBP Plan to designate eligible participants and determine
the conditions and limitations applicable to such awards, if any. The awards may
be granted singly or together with other awards, or as replacement of, in
combination with, or as alternatives to, grants or rights under the ExBP Plan or
other employee benefit plans. Awards under the ExBP Plan may be issued based on
past performance, as an incentive for future efforts or contingent upon the
future performance. No amounts have been awarded under the Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, we agreed to purchase Competitive Communications, Inc. from Mr. David
Kline II for 1,000,000 shares of its Class A, Convertible Preferred Stock. Mr.
Kline II owned a 100% equity interest in Competitive Communications. Management
believes that the quality and pricing of these assets acquired were comparable
to those available from unrelated vendors.
<TABLE>
<CAPTION>
PRINCIPAL STOCKHOLDERS
------------------------------------------ ----------------------------- ---------------------- ----------------------
Name Number of Shares Percentage before Percentage after
Merger Merger
------------------------------------------ ----------------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Michael Godfree 275,000 5.6 4.6
------------------------------------------ ----------------------------- ---------------------- ----------------------
Larry Halstead 325,000 6.6 5.4
------------------------------------------ ----------------------------- ---------------------- ----------------------
Judy Kline 1,000,000 20.4 16.6
------------------------------------------ ----------------------------- ---------------------- ----------------------
David Kline II 750,000 15.3 12.4
------------------------------------------ ----------------------------- ---------------------- ----------------------
Richard Moore 260,500 5.3 4.3
------------------------------------------ ----------------------------- ---------------------- ----------------------
Jerald Woods 213,600 4.4 3.5
------------------------------------------ ----------------------------- ---------------------- ----------------------
All directors and named executive 1,563,600 31.9 25.9
officers (as a group of 4 persons)
------------------------------------------ ----------------------------- ---------------------- ----------------------
</TABLE>
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<PAGE>
This table is based upon information derived from its stock records. Unless
otherwise indicated in the footnotes to this table and subject to community
property laws where applicable, Competitive Companies believes that each of the
shareholders named in this table has sole or shared voting and investment power
with respect to the shares indicated as beneficially owned. Applicable before
merger percentages are based upon 4,907,061 shares of Common Stock outstanding
as of September 30, 2000. Applicable after-merger percentages are based upon
6,032,061 shares of Common Stock outstanding as of September 30, 2000, including
the 125,000 shares retained by shareholders of Third Enterprise Service Group
and the 1,000,000 shares to be issued to Huntington Partners.
DESCRIPTION OF COMPETITIVE COMPANIES CAPITAL STOCK
-------------------------------------------------------------------------------
Shares Of Capital Stock Outstanding
Authorized Capital Stock As of September 30, 2000
46,000,000 common stock 4,907,061 shares of common stock
------------------------------------------------------------------------------
4,000,000 of preferred stock 4,000,000 shares of preferred stock
------------------------------------------------------------------------------
Common Stock
Competitive Companies is authorized to issue 46,000,000 shares of no par ***[on
certificates and filing said $0.001 par value] common stock. As of September 30,
2000, there were 4,907,061 shares of common stock outstanding held of record by
127 stockholders.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The common stock
has no preemptive or conversion rights or other subscription rights. There are
no sinking fund provisions applicable to the common stock. The outstanding
shares of common stock are, and the shares of common stock to be issued upon
completion of this offering will be, fully paid and non-assessable.
Preferred Stock
4,000,000 shares of Class A Convertible Preferred Stock are authorized and
outstanding. They were issued to the following:
<TABLE>
<CAPTION>
Name Number of Shares Date Issued Certificate Number
<S> <C> <C> <C>
David Kline II 1,000,000 April 7, 1998 P-001
Judy Kline 2,000,000 December 28, 1999 P-002
David Kline II 750,000 December 28, 1999 P-003
Larry Halstead 250,000 December 28, 1999 P-004
Total 4,000,000
</TABLE>
3,000,000 shares of Class A Convertible Preferred Stock were issued to various
founding stockholders and management in December 1999. Upon the occurrence of
the following events , these 4,000,000shares are convertible into 20,000,000
shares of common stock. Conversion may occur at any time, in whole or in part up
to the percentage associated with the achievement of the following events for a
period commencing on the date such event was achieved and ending on December 31,
2010. Events:
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<PAGE>
1. Achieving 100% increase in the combined number of Company owned MDUs
passings and non-MDU customers. (For passings count purposes a passing
is an individual apartment in a multi-dwelling unit (MDU) under
contract with the Company (not in a Company partnership) for telephone,
television or Internet service by the Company or its subsidiaries. The
Company had 1,438 Company MDUs as of the issuance date. For non-MDU
customer count purposes a non-MDU residential or business customer who
has multiple major services, i.e., telephone, Internet, television, is
counted once for each major service to which they subscribe. The
Company had 2 telephone business customers.) - 50%
2. Achieving 10,000 customers in the combined number of Company owned
MDUs passings and non-MDU customers. (See 1 above
for definition of MDU passing and non-MDU customer.) - 25%
3. Achieving 20,000 customers in the combined number of Company owned
MDUs passings and non-MDU customers. (See 1 above
for definition of MDU passing and non-MDU customer.) - 25%
The conversion rate is subject to proportional adjustment in the event of a
stock split, stock dividend or similar recapitalization event effecting such
shares. Holders of the preferred shares are not entitled to preferential
dividend rights, redemption or voting rights, except as may be required by law.
They are not entitled to vote on the merger.
Competitive Companies will issued on or before the merger closes 2,440,436
shares of Class B Convertible Preferred Stock to holders of 2,440,436 shares of
Class A common stock currently held, entitling persons owning the Class B shares
the following: the stock shall convert into such number or fraction there of
shares of common stock based upon the following: 1 - the fraction [average of
opening bid and ask price on the otcbb/$3.00] divided by {the fraction [average
of opening bid and ask price on the otcbb/$3.00]} . for example, assume average
opening bid/ask of $2.00. 1 - 2/3 = 1/3. 1/3 divided by 2/3 = .5 additional
share of common stock issued upon conversion.
Issuance of preferred stock with voting and conversion rights may harm the
voting power of the holders of common stock, including voting rights of the
holders of common stock. In certain circumstances, an issuance of preferred
stock could have the effect of decreasing the market price of the common stock.
We currently have no plans to issue any additional shares of preferred stock.
Options.
The company currently has 5,295,000 outstanding non-statutory options to the
following:
<TABLE>
<CAPTION>
Name Number of Option Exercise Price Date Issued Number
<S> <C> <C> <C> <C>
David Bower 100,000 $0.001 March 25, 1998 98-E00005
James Gibson 50,000 $1.00 July 31, 2000 00-N00001
Michael Godfree 375,000 $0.001 March 25, 1998 98-E00004
Larry Halstead 990,000 $0.001 March 25, 1998 98-E00002
James Healey 50,000 $1.00 October 1, 1999 99-N00001
60
<PAGE>
Veronica Hernandez 5,000 $0.001 March 25, 1998 98-E00011
Vladimir Joncich 30,000 $0.001 March 25, 1998 98-E00007
Judy Kline 2,625,000 $0.001 March 25, 1998 98-E00001
David Loving 15,000 $0.001 March 25, 1998 98-E00008
Heidi Newson 5,000 $0.001 March 25, 1998 98-E00010
Russell Preston 155,000 $0.001 June 14, 1999 99-E00001
Russell Preston 300,000 $0.85 June 14, 1999 99-E00002
Thanh Vu 75,000 $0.001 March 25, 1998 98-E00006
Jerald Woods 500,000 $0.001 March 25, 1998 98-E00003
Linda Wright 15,000 $0.001 March 25, 1998 98-E00009
Total 5,290,000
</TABLE>
The general terms to exercise the options for all except James Healey and
James Gibson are the same. Exercise dates and amounts which can be exercised
vary. No options may be exercised until two years after initial grant of the
individual option. Options are normally exercisable over a five year period as
follows: at the end of:
o First year - 0%,
o Second year - 40%
o Third through fifth year - 20% each year.
Mr. Healey and Mr. Gibson are independent agents for the sale of its products.
The options granted require certain levels of performance from them in order for
them to exercise each level.
Transfer agent and registrar
The transfer agent and registrar for its stock is Competitive Companies, Inc.
Attn: Larry Halstead, 3751 Merced Drive, Suite A, Riverside, California 92503.
Director and Officer Indemnification
The Nevada General Corporation Law provides that corporations may relieve
Directors of monetary liability for breach of their fiduciary duty as Directors,
provided that such provision shall not eliminate or limit the liability of a
director for:
o Any breach of the Director's duty of loyalty to the corporation or
its stockholders,
o Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o Unlawful payment of a dividend or unlawful stock purchase or
redemption,
o Any transaction from which the director derived an improper personal
benefit.
Competitive Companies provides that its directors are not liable to the company
or its stockholders for monetary damages for breach of their fiduciary duty as
directors to the fullest extent permitted by Nevada law. Its bylaws provide that
the company may indemnify directors, officers, employees or agents to the
fullest extent permitted by law and Competitive Companies has agreed to provide
such indemnification to each of its directors.
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<PAGE>
The above provisions and written indemnity agreements may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their fiduciary duty, even though such an action, if
successful, might otherwise have benefited the company and its stockholders.
However, the company believes the foregoing provisions are necessary to attract
and retain qualified persons as directors.
The articles provide, if not amended that to the fullest extent permitted by
Nevada law directors and officers of the company are not personally liable for
monetary damages to the company for certain breaches of their fiduciary duty as
directors or officers. This provision would have no effect on the availability
of equitable remedies or non-monetary relief, such as an injunction or
rescission for breach of the duty of care. In addition, the provision applies
only to claims against a director or officer arising out of his role as a
director or officer and not in any other capacity. Further, liability of a
director or officer for violations of the federal securities laws are not
limited by this provision. Directors and officers, however, will no longer be
liable for monetary damages arising from decisions involving violations of the
duty of care which could be deemed grossly negligent.
Competitive Companies is subject to the provisions of Section 78.411 et seq. of
the Nevada General Corporation Law. The Business Combination Act provides, with
certain exceptions, that a Nevada corporation may not engage in any of a broad
range of business combinations with a person or affiliate, or associate of such
person, who is an interested stockholder for a period of three years from the
date that such person became an interested stockholder, unless the transaction
resulting in a person becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before the
person becomes an interested stockholder.
Insofar as indemnification for liabilities arising under the securities act may
be permitted to directors, officers or persons controlling the registrant under
the foregoing provisions, the registrant has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against the
public policy and is therefore, unenforceable.
Provisions with possible anti-takeover effects
The Business Corporation Act further provides that a Nevada corporation may not
engage in such a business combination after the expiration of three years from
the date that such person became an interested stockholder, unless the business
combination is approved by the board of directors of the corporation before the
person became an interested stockholder or by the affirmative vote of a majority
of outstanding votes not beneficially owned by the interested stockholder at a
meeting called not earlier than three years after the interested stockholder's
date of acquiring shares.
Under the Business Combination Act, an interested stockholder is defined as
any person that is
o The owner of 10% or more of the outstanding voting stock of the
corporation
o An affiliate or associate of the corporation and was the owner of 10%
or more of the outstanding voting stock of the corporation at any time
within the three year period immediately prior to the date on which it
is sought to be determined whether such person is an interested
stockholder.
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<PAGE>
At its option, a corporation may exclude itself from the coverage of the
Business Combination Act by amending its Articles by action of its stockholders,
other than interested stockholders and their affiliates and associates, to
exempt itself from coverage, provided that such charter amendment may not become
effective until 18 months after the date it is adopted and does not apply to any
combination of the corporation with an interested stockholder whose date of
acquiring shares is on or before the effective date of the amendment.
Competitive Companies has not adopted such an amendment to its articles.
ACQUISITION OF ASSETS FROM
HUNTINGTON TELECOMMUNICATIONS PARTNERS, LP
On August 7, 2000, Huntington Telecommunications Partners, LP, a California
limited partnership, Third Enterprise Service Group, and Competitive Companies
entered into an asset purchase agreement.
The agreement covers all the assets of Huntington Partners which are part of the
private telephone and cable television systems owned by Huntington Partners and
installed under right of entry agreements at four apartment complexes in
California. Right of entry agreements include private telephone service to
residents at all four complexes that is provided under Shared Tenant Services
provisions and cable television for residents at two of the four complexes.
The purchase price payable by Third Enterprise Service Group to Huntington
Partners at Closing is one million shares of common stock of Third Enterprise
Service Group. The initial purchase price will be increased, if at all, as
provided in the one million shares of Class B Preferred Stock to be issued as
additional payment for the assets. If the average of the closing bid price for
the Third Enterprise Service Group's Common Stock for the Adjustment Period is
less than $3.00 per share, Third Enterprise Service Group will issue to
Huntington Partners additional shares of its Common Stock so that the total
number of shares received by the Huntington Partners on account of this
Agreement, including Common Stock delivered on account of the Initial Purchase
Price, when valued at the Opening Price shall have an aggregate nominal value of
$3,000,000. If the Opening Price is $3.00 or over per share, no additional
shares shall be issued. For purposes of determining the Opening Price, purchases
of Common Stock by the Third Enterprise Service Group or its Affiliates or
persons controlled by the Third Enterprise Service Group or its Affiliates shall
be disregarded. The Adjustment Period refers to the five business day period
immediately following the Closing; provided however, that if trades have not
been executed on at least three of those five days, the Adjustment Period shall
be extended until the Common Stock shall have been traded on at least three
days, and the average closing bid price for those three trading days shall be
the Opening Price.
The agreement also provides that the shareholders of Third Enterprise Service
Group existing immediately prior to closing shall not be liable for any
liabilities attributed to Third Enterprise Service Group, and the parties
further agreed not to seek, demand, request or sue such shareholders for any
losses caused by or attributed to Third Enterprise Service Group.
THIRD ENTERPRISE SERVICE GROUP'S BUSINESS
History and Organization
We were organized as a corporation under the laws of the state of Florida in
April, 1999. Since inception, our primary activity has been directed to
organizational efforts. We were formed as a vehicle to acquire a private company
desiring to become an SEC reporting company in order thereafter to secure a
listing on the over the counter bulletin board. The company we have identified
and agreed to acquire is Competitive Companies.
63
<PAGE>
Operations
We do not currently engage in any business activities that provide any cash
flow. The costs of identifying, investigating, and analyzing the merger with
Competitive Companies have been and will continue to be paid with money in our
treasury or loaned by management. This is based on an oral agreement between
management and us.
Employees
We presently have no employees. Our officer and director is engaged in business
activities outside of us. It is anticipated that management will devote the time
necessary each month to our affairs of until a successful business opportunity
has been acquired.
Selected Financial Data
The following information concerning our financial position and operations is as
of and for the period inception through June 30 31, 1999.
Total assets $ 0
Total liabilities 0
Equity 0
Sales 0
Net loss 6,079
Net loss per share 0
Management Discussion And Analysis Or Plan Of Operation
We are a development stage entity, and have neither engaged in any operations
nor generated any revenues to date. We have no assets. Our expenses to date,
all funded by a loan from management, are $6,079.
Substantially all of our expenses that must be funded by management have been
and will be from our efforts to identify a suitable acquisition candidate and
close the acquisition. Management has orally agreed to fund our cash
requirements until an acquisition is closed. So long as management does so, we
will have sufficient funds to satisfy our cash requirements. This is primarily
because we anticipate incurring no significant expenditures. Before the
conclusion of the acquisition of Competitive Companies, we our expenses have
been and will continue to be limited to accounting fees, legal fees, telephone,
mailing, filing fees, occupational license fees, and transfer agent fees.
We do not intend to seek additional financing. At this time we believe that the
funds to be provided by management will be sufficient for funding our operations
until we close the acquisition of Competitive Companies and therefore do not
expect to issue any additional securities before the closing of the acquisition
of Competitive Companies.
64
<PAGE>
Properties
We are presently using the office of Michael T. Williams, 2503 W. Gardner Ct.,
Tampa FL, at no cost. Such arrangement is expected to continue only until a
business combination is closed, although there is currently no such agreement
between us and Mr. Williams. We at present own no equipment, and do not intend
to own any.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of June 30, 2000 by
o Each shareholder known by us to own beneficially more than 5% of the common
stock
o Each executive officer
o Each director and all directors and executive officers as a group:
<TABLE>
<CAPTION>
Name Number of Shares Percentage Number of Shares Percentage after
Pre-Merger(1) before merger Post-Merger (1) merger
<S> <C> <C> <C> <C>
Michael T. Williams(1) 1,000,000 100% 125,000 2%
100 100%
2503 W. Gardner Ct.
Tampa FL 33611
All directors and named 1,000,000 100% 125,000 2%
executive officers as a group (one
person)
</TABLE>
This table is based upon information derived from our stock records. Unless
otherwise indicated in the footnotes to this table and subject to community
property laws where applicable, we believe that each of the shareholders named
in this table has sole or shared voting and investment power with respect to the
shares indicated as beneficially owned. Applicable percentages are based upon
1,000,000 shares of Common Stock outstanding as of June 30, 2000.
(1) Includes 101,000 shares owned by the Williams Trust, with beneficiaries as
Tenants by the Entireties of Michael Williams and Donna Williams, his wife.
Under the terms of the trust, all sales decisions will be made exclusively by
the trustee. Includes 2,000 shares owned by Brandon Williams Revocable Trust.
Brandon is the son of Mr. and Mrs. Williams. Also includes 2,000 shares each
owned by 10 of Mr. and Mrs. Williams nieces and nephews, current and to-be, and
a trust related to a family property in Vermont of which Mr. and Mrs. Williams
are currently a beneficiary. Mr. Williams disclaims beneficial ownership of
these 24,000 shares. In connection with the merger, we agreed to effect a
reverse split such that Mr. Williams' Trust will own 101,000 shares prior to the
closing of the merger. The shares held by other shareholders are subject to
anti-dilution provisions and thus won't be affected by this reverse split.
Mr. Williams may be deemed our founder, as that term is defined under the
securities act of 1933.
Directors and Executive Officers
65
<PAGE>
The following table and subsequent discussion sets forth information about our
director and executive officer, who will resign upon the closing of the
Competitive Companies merger. Our director and executive officer was elected to
his position in April, 1999.
Name Age Title
Michael T. Williams 52 President, Treasurer and Director
Since 1975 Mr. Williams has been in the practice of law, initially with the US
Securities and Exchange Commission until 1980, and since then in private
practice. He was also chief executive officer of Florida Community Cancer
Centers, Dunedin, FL from 1991-1995. He received a BA from the University of
Kansas and a JD from the University of Pennsylvania.
Executive Compensation
The following table sets forth all compensation awarded to, earned by, or paid
for services rendered to Third Enterprise Service Group in all capacities during
the period ended December 31, 1999, by its executive officer.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal Position Annual Compensation - 1999
Salary, $, Bonus, $, Number of Shares Underlying Options, #,
<S> <C> <C> <C>
Michael T. Williams, President None None None
</TABLE>
Certain Relationships and Related Transactions
Upon formation, Mr. Williams was issued 1,000,000 shares. In connection with the
merger, we agreed to effect a reverse split such that Mr. Williams'
Trust will
own 101,000 shares prior to the closing of the merger.
Legal Proceedings
We not a party to or aware of any pending or threatened lawsuits or other legal
actions.
Indemnification of Directors and Officers
Our director is bound by the general standards for directors provisions in
Florida law. These provisions allow him in making decisions to consider any
factors as he deems relevant, including our long-term prospects and interests
and the social, economic, legal or other effects of any proposed action on the
employees, suppliers or our customers, the community in which the we operate and
the economy. Florida law limits our director's liability.
We have agreed to indemnify our director, meaning that we will pay for damages
they incur for properly acting as director. The SEC believes that this
indemnification may not be given for violations of the securities act of 1933.
66
<PAGE>
Insofar as indemnification for liabilities arising under the securities act may
be permitted to directors, officers or persons controlling the registrant under
the foregoing provisions, the registrant has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against the
public policy and is therefore, unenforceable.
Provisions With Possible Anti-Takeover Effects
Section 607.0902 of Florida law restricts the voting rights of certain shares of
a corporation's stock when those shares are acquired by a party who, by such
acquisition, would control at least one-fifth of all voting rights of the
corporation's issued and outstanding stock. The statute provides that the
acquired shares, the control shares, will, upon such acquisition, cease to have
any voting rights. The acquiring party may, however, petition the corporation to
have voting rights re-assigned to the control shares by way of an acquiring
person's statement submitted to the corporation in compliance with the
requirements of the statute. Upon receipt of such request, the corporation must
submit, for shareholder approval, the acquiring person's request to have voting
rights re-assigned to the control shares. Voting rights may be reassigned to the
control shares by a resolution of a majority of the corporation's shareholders
for each class and series of stock. If such a resolution is approved, and the
voting rights re-assigned to the control shares represent a majority of all
voting rights of the corporation's outstanding voting stock, then, unless the
corporation's articles of incorporation or Bylaws provide otherwise, all
shareholders of the corporation will be able to exercise dissenter's rights in
accordance with Florida law.
A corporation may, by amendment to its articles of incorporation or bylaws,
provide that, if the party acquiring the control shares does not submit an
acquiring person's statement in accordance with the statute, the corporation may
redeem the control shares at any time during the period ending 60 days after the
acquisition of control shares. If the acquiring party files an acquiring
person's statement, the control shares are not subject to redemption by the
corporation unless the shareholders, acting on the acquiring party's request,
deny full voting rights to the control shares.
The statute does not alter the voting rights of any stock of the corporation
acquired in any of the following manners:
o Under the laws of intestate succession or under a gift or
testamentary transfer
o Under the satisfaction of a pledge or other security interest
created in good faith and not for the purpose of circumventing
the statute
o Under either a merger or merger if the corporation is a party to
the agreement or plan of exchange or merger
o Under any savings, employee stock ownership or other benefit plan
of the corporation
o Under an acquisition of shares specifically approved by the
board of directors of the corporation
DESCRIPTION OF THIRD ENTERPRISE SERVICE GROUP'S CAPITAL STOCK
Authorized Capital Stock Shares Of Capital Stock Outstanding
50,000,000 Common 1,000,00
20,000,000 Preferred none
Common Stock
67
<PAGE>
We are authorized to issue 50,000,000 shares of no par common stock. As of June
30, 2000, there were 1,000,000 shares of common stock outstanding held of record
by *** stockholders. There will be *** shares of common stock outstanding after
giving effect to the issuance of the shares of common stock under this
prospectus.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The common stock
has no preemptive or conversion rights or other subscription rights. There are
no sinking fund provisions applicable to the common stock. The outstanding
shares of common stock are, and the shares of common stock to be issued upon
completion of this offering will be, fully paid and non-assessable.
Preferred Stock
We are authorized to issue 20,000,000 shares of preferred stock. There are no
shares of preferred stock outstanding. We currently have no plans to issue any
shares of preferred stock except on a one share for one share basis to the
shareholders of Class A and Class B preferred stock of Competitive Companies.
Options
We currently have no plans to issue any stock options except on a one for one
share to the persons holding options in Competitive Companies.
Dividends
We have never paid any dividends and do not expect to do so after the closing of
the merger and thereafter for the foreseeable future.
Transfer Agent And Registrar
We are the transfer agent and registrar for our common stock.
COMPARISON OF RIGHTS OF THIRD ENTERPRISE SERVICE GROUP STOCKHOLDERS
AND COMPETITIVE COMPANIES SHAREHOLDERS
Because Third Enterprise Service Group will change its state of incorporation,
articles and bylaws to be the same as those of Competitive Companies, the rights
of shareholders of Competitive Companies will not change as a result of the
merger.
AVAILABLE INFORMATION
Neither Competitive Companies nor Third Enterprise Service Group are subject to
the reporting requirements of the Exchange Act and the rules and regulations
promulgated thereunder, and, therefore, do not file reports, information
statements or other information with the Commission. Third Enterprise Service
Group has filed with the Commission a registration statement on Form S-4 under
the Securities Act. This prospectus constitutes the prospectus of Third
Enterprise Service Group that is filed as part of the Registration Statement in
accordance with the rules and regulations of the Commission. Copies of the
registration statement, including the exhibits to the Registration Statement and
other material that is not included herein, may be inspected, without charge, at
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549, and may be available at the
following Regional Offices of the Commission: Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such materials may be obtained at
68
<PAGE>
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Information on
the operation of the Public Reference Room may be obtained by calling the
Commission at 1-800-SEC-0330. In addition, the Commission maintains a site on
the World Wide Web at http://www.sec.gov that contains reports, information and
information statements and other information regarding registrants that file
electronically with the Commission.
LEGAL MATTERS
The validity of the shares of Third Enterprise Service Group common stock being
offered by this prospectus and certain federal income tax matters related to the
exchange are being passed upon for Third Enterprise Service Group by Williams
Law Group, P.A., Tampa, FL. Mr. Williams is the sole officer and director of and
owns 1,000,000 shares pre merger and 101,000 shares post merger of the stock of
Third Enterprise Service Group.
69
<PAGE>
FINANCIAL STATEMENTS
COMPETITIVE COMPANIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements as of
and for the three and six months ended
June 30, 2000 and 1999
(Unaudited)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
Balance Sheet F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
--------------------------------------------------------------------------------
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
2000 December 31,
ASSETS (Unaudited) 1999
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 299,604 $ 400,672
Receivables:
Accounts, net of allowance for doubtful
accounts of $89,279 and $86,569 respectively 139,487 167,752
Unbilled 32,002 32,002
Inventories 34,454 34,454
Prepaid expenses and other current assets 10,577 10,577
------------- -------------
Total current assets 516,124 645,457
------------- -------------
PROPERTY AND EQUIPMENT - NET 580,694 639,779
OTHER ASSETS 28,970 11,631
------------- -------------
TOTAL $ 1,125,788 $ 1,296,867
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 29,001 $ 109,717
Advances from stockholders 48,717 35,766
Current maturities of long-term debt 64,000 70,728
Current maturities of capital lease obligations 72,000 81,761
Accrued and other liabilities 18,141 7,721
------------- -------------
Total current liabilities 231,859 305,693
LONG-TERM DEBT (net of current maturities) 296,100 360,812
CAPITAL LEASE OBLIGATIONS (net of current 100,000 117,457
maturities)
------------- -------------
Total liabilities 627,959 783,962
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A convertible preferred stock, $0.001 par
value; 4,000,000 shares authorized, issued and
outstanding with a liquidation value of $40,000 4,000 4,000
Class A common stock, $0.001 par value, 46,000,000
shares authorized, 4,852,061 shares issued and
outstanding 4,852 4,852
Additional paid-in capital 16,642,221 16,642,221
Deficit (16,153,244) (16,080,668)
Subscriptions receivable - (57,500)
------------- -------------
Total stockholders' equity 497,829 512,905
------------- -------------
TOTAL $ 1,125,788 $ 1,296,867
============= =============
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-2
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three-Months Three-Months
Six-Months Six-Months Ended Ended
Ended Ended June 30, June 30,
June 30, June 30, 2000 1999
2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES $ 793,880 $ 662,703 $ 398,058 $ 355,858
COSTS OF REVENUES 525,574 505,220 246,719 246,267
----------- ----------- ------------ -----------
GROSS PROFIT 268,306 157,483 151,339 109,591
----------- ----------- ------------ -----------
OTHER OPERATING EXPENSES:
Occupancy and equipment 59,219 82,741 38,163 41,431
Employee compensation 98,129 65,580 46,495 28,621
Provision for bad debts 38,228 9,567 25,142 4,784
Professional fees 49,868 27,466 32,386 13,362
General and administrative 60,267 95,760 26,160 39,505
----------- ----------- ------------ -----------
Total other operating
expenses 305,711 281,114 168,346 127,703
----------- ----------- ------------ -----------
LOSS FROM OPERATIONS (37,405) (123,631) (17,007) (18,112)
----------- ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Other income 1,280 - - -
Interest expense (36,451) (62,294) (20,275) (32,548)
----------- ----------- ------------ -----------
Total other expense-net (35,171) (62,294) (20,275) (32,548)
----------- ----------- ------------ -----------
NET LOSS $ (72,576) $(185,925) $ (37,282) $ (50,660)
=========== =========== ============ ===========
NET LOSS PER SHARE:
Basic and diluted $ (0.02) $ (0.05) $ (0.01) $ (0.01)
=========== =========== ============ ===========
Weighted average number of
shares - basic and diluted 4,852,061 3,750,000 4,852,061 4,000,000
=========== =========== ============ ===========
--------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class A Additional
Common Stock Preferred Stock Paid-in Accumulated Subscription
Shares Amount Shares Amount Capital (Deficit) Receivable Total
--------- ------- --------- ------- ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1999 4,852,061 $4,852 4,000,000 $4,000 $16,642,221 $(16,080,668)$(57,500) $512,905
Collection of
subscription
Receivable - - - - - - 57,500 57,500
Net loss for the
six months ended
June 30, 2000 - - - - - (72,576) - (72,576)
--------- ------- --------- -------- ---------- ------------- --------- ----------
Balances at June 4,852,061 $4,852 4,000,000 $4,000 $16,642,221 $(16,153,244)$ - $497,829
========= ======= ========= ======== ========== ============= ========= ==========
</TABLE>
-------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-4
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-Months Six-Months Three-Months Three-Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (72,576) $(185,925) $ (37,282) $(50,660)
Adjustment to reconcile net loss
to net cash used by
operating activities:
Depreciation and amortization 69,888 41,325 56,345 21,962
Provision for bad debts 2,710 - 2,158 -
Changes in assets and liabilities, net:
(Increase) Decrease in 25,555 12,684 25,980 24,361
receivables
Decrease in pre-paid expenses - 7,906 - 4,088
Increase in other assets (17,339) - - -
(Decrease) increase in accounts (80,716) 260,519 (10,563) 145,742
payable
(Decrease) increase in accrued 10,420 (16,082) (6,382) (2,732)
and other liabilities
Increase (decrease) in due to bank - (13,675) - (24,846)
----------- ----------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (62,058) 106,752 30,256 117,915
------------ ----------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES-
Purchases of property and equipment (10,803) (83,715) (5,478) (74,864)
------------ ----------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common 57,500 140,490 - 95,490
stock, net
Repayment on notes (71,440) (48,825) (38,878) (14,579)
Repayment on capital lease obligations (27,218) (51,159) (12,186) (42,242)
Stockholder advances 12,951 (26,326) 7,500 (44,503)
------------ ----------- ------------ ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (28,207) 14,180 (43,564) (5,834)
------------ ----------- ------------ ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (101,068) 37,217 (18,786) 37,217
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 400,672 - 318,390 -
------------ ----------- ------------ ----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 299,604 $ 37,217 $ 299,604 $ 37,217
============ =========== ============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 36,451 $ 62,294 $ 20,275 $ 32,548
============ =========== ============ ==========
</TABLE>
-------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-5
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
--------------------------------------------------------------------------------
NOTE A - BUSINESS OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Competitive Companies, Inc. (the "Parent") was incorporated under the laws of
the state of Nevada in March 1998. In 1998, the Company acquired all of the
assets and assumed all of the liabilities of Competitive Communications, Inc.
("CCI"), which was incorporated under the laws of the state of California in
February 1996. CCI is the successor to Western Telephone & Television, which was
founded in 1985.
CCI and its Parent (collectively, the "Company") provide telephone, cable
television, long distance/interexchange, and public telephone service to
customers who live in multi-tenant residential buildings. The Company's
operations are located in Riverside, California and approximately 80% of its
customers are California residents.
In addition to the above, in January 2000, the Parent formed CCI Residential
Services, Inc. This entity, which is a wholly owned subsidiary of the Parent,
intends to offer and expand on the residential services currently being provided
by CCI, while CCI will focus on developing revenue streams from other services.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-QSB
and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission
("SEC"). Accordingly, the financial statements do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results for the year ended December 31, 2000. The
accompanying condensed consolidated financial statements and notes thereto
should be read in conjunction with the Company's audited financial statements as
of December 31, 1999 and 1998.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may be
affected by the estimates and assumptions management is required to make. Actual
results could differ significantly from those estimates.
F-6
<PAGE>
NOTE B- OTHER RELATED PARTY TRANSACTIONS
The Company periodically borrows funds from various stockholders. At June 30,
2000, advances from stockholders were $48,717. The advances are unsecured,
non-interest bearing and due on demand.
The Company provides billing, collection and certain other administrative
services, as well as certain telephone and cable services, to Huntington
Telecommunications Partners, L.P. ("HTP"), a California limited partnership in
which the Company has a 5% limited partnership interest. As consideration for
such services, the Company received approximately $41,000 for the six months
ended June 30, 2000. Additionally, the Company sold $120,000 in long distance
services to HTP during the six months ended June 30, 2000.
NOTE C - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in certain arbitration with Personal Communications
Spectrum V; an entity in which it has a 10% ownership interest (the "Claimant").
Pursuant to terms of a purchase and sale agreement, the Claimant was obligated
to purchase certain cable television and telephone systems (the "Systems")
having a cost of approximately $460,000. However, because the Claimant failed to
pay the entire purchase price, and fulfill its other obligations under the
purchase and sale agreement, the Company has paid approximately $57,000 of
System costs and, in addition, incurred approximately $85,000 of costs arising
from the maintenance and operation of the Systems. As a result thereof, the
Company has asserted their rights to ownership of the Systems, and the Claimant
is seeking to recover approximately $403,000 of costs it incurred for the
Systems.
The parties have tentatively reached a settlement agreement whereby in exchange
for full title to the Systems, the Company will pay cash and issue to the
Claimant shares of its Class A common stock. Because management believes that
such consideration will approximate the fair market value of the Systems, and
because some uncertainty remains regarding the ultimate resolution of the matter
(e.g. as a condition precedent to finalizing the settlement agreement, the
Company will require liability releases from each of the Claimant's investors),
no effect has been given to this proposed settlement transaction in the
accompanying consolidated financial statements.
Proposed Common Stock Registration
The Company has entered into an agreement to merge with Third Enterprise Service
Group, Inc. ("TESG"). Pursuant to terms of the merger, the Company's
stockholders would receive an equal number of shares in TESG, and the
stockholder of TESG would retain less than 5% of the Company's outstanding stock
after the merger. TESG is an acquisition company with no operations or assets.
In December 1999, a registration statement was filed with the Securities and
Exchange Commission for the registration of all the Company's outstanding shares
after giving effect to this merger. An amendment is expected to be filed during
2000.
Merger with Huntington Telecommunications Partners, L.P. ("HTP")
In February 2000, the Company and TESG agreed to merge with HTP. The merger
closed in August 2000. As discussed in Note C, the Company provides management
and administrative services to HTP, as well as telephone and cable service.
--------------------------------------------------------------------------------
F-7
<PAGE>
COMPETITIVE COMPANIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements as of
and for the years ended
December 31, 1999 and 1998
and
Independent Auditors' Report
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors' Report F-9
Consolidated Financial Statements:
Balance Sheet as of December 31, 1999 F-10
Statements of Operations for the years ended
December 31, 1999 and 1998 F-11
Statements of Stockholders' (Deficit) Equity for the years
ended December 31, 1999 and 1998 F-12
Statements of Cash Flows for the years ended
December 31, 1999 and 1998 F-13
Notes to Financial Statements F-14
--------------------------------------------------------------------------------
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Competitive Companies, Inc.:
We have audited the accompanying consolidated balance sheet of Competitive
Companies, Inc. and subsidiary (the "Company") as of December 31, 1999, and the
related consolidated statements of operations, stockholders' (deficit) equity
and cash flows for the years ended December 31, 1999 and 1998. 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999, and the results of its operations and cash flows for the
years ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
As discussed in Note I to the financial statements, the Company is involved in
certain arbitration. Because the ultimate outcome of the matter cannot presently
be determined, no provision for any loss that may result upon its resolution has
been made in the accompanying consolidated financial statements.
KINGERY, CROUSE & HOHL, P.A.
June 20, 2000
Tampa, FL
F-9
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 400,672
Receivables:
Accounts, net of allowance for doubtful accounts of
$86,569 167,752
Unbilled 32,002
Inventories 34,454
Prepaid expenses and other current assets 10,577
-----------
Total current assets 645,457
PROPERTY AND EQUIPMENT - NET 639,779
OTHER ASSETS 11,631
-----------
TOTAL $1,296,867
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 109,717
Advances from stockholders 35,766
Current maturities of long-term debt 70,728
Current maturities of capital lease obligations 81,761
Accrued and other liabilities 7,721
-----------
Total current liabilities 305,693
LONG-TERM DEBT (net of current maturities) 360,812
CAPITAL LEASE OBLIGATIONS (net of current maturities) 117,457
-----------
Total liabilities 783,962
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A convertible preferred stock, $0.001 par value;
4,000,000 shares authorized, issued and outstanding with
a liquidation value of $40,000 4,000
Class A common stock, $0.001 par value, 46,000,000 shares
authorized; 4,852,061 shares issued and outstanding 4,852
Additional paid-in capital 16,642,221
Deficit (16,080,668)
Subscriptions receivable (57,500)
-----------
Total stockholders' equity 512,905
-----------
TOTAL $1,296,867
===========
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-10
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
REVENUES $ 1,452,489 $ 1,279,046
COSTS OF REVENUES 1,095,455 963,411
------------- ------------
GROSS PROFIT 357,034 315,635
------------- ------------
OTHER OPERATING EXPENSES:
Stock based compensation expense 15,443,277 -
Occupancy and equipment 117,584 90,904
Employee compensation and benefits 145,974 181,328
Provision for bad debt 23,282 60,999
Professional fees 66,501 10,330
General and administrative 209,964 121,558
------------- ------------
Total other operating expenses 16,006,582 465,119
------------- ------------
LOSS FROM OPERATIONS (15,649,548) (149,484)
------------- ------------
OTHER INCOME (EXPENSE):
Other income - 85,489
Interest expense (77,343) (110,397)
------------- ------------
Total other expense-net (77,343) (24,908)
------------- ------------
NET LOSS $(15,726,891) $ (174,392)
============= ============
NET LOSS PER SHARE:
Basic and diluted $ (3.82) $ ( 0.05)
============= ============
Weighted average number of shares - basic
and diluted 4,118,000 3,313,000
============= ============
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-11
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class A Additional
Common Stock Preferred Stock Paid-in Accumulated Subscription
Shares Amount Shares Amount Capital (Deficit) Receivable Total
-------- -------- -------- ------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1998 3,302,700 $3,303 1,000,000 $1,000 $ 0 $(179,385) $ 0 $(175,082)
Sale of common 82,000 82 81,918 82,000
Contributed
capital 15,813 15,813
Stock issuance
costs (63,701) (63,701)
Net loss (174,392) (174,392)
-------- -------- -------- ------ ---------- ----------- ----------- ---------
Balances at
December 31,
1998 3,384,700 3,385 1,000,000 1,000 34,030 (353,777) (315,362)
Sale of common
stock 885,000 855 854,145 (57,500) 797,500
Sale of common
stock at discount
for services 383,852 384 383,468 383,852
Issuance of
common stock
for services 119,425 119 119,306 119,425
Issuance of
common stock
for conversion
of debt 109,084 109 108,975 109,084
Issuance of
options for
services 245,000 245,000
Issuance of Class
A Convertible
Preferred Stock 3,000,000 3,000 14,997,000 15,000,000
Stock issuance
costs (99,703) (99,703)
Net loss (15,726,891) (15,726,891)
-------- -------- -------- ------ ---------- ------------ --------- ----------
Balances at
December 31,
1999 4,852,061 $4,852 4,000,000 $4,000 $16,642,221 $(16,080,668) $(57,500) $512,905
======== ======== ======== ====== ========== ============ ========= ==========
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-12
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,726,891) $ (174,392)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 88,781 63,152
Provision for bad debts 23,282 60,999
Non-cash compensation 15,443,277 -
Non-cash interest expense 9,084 38,023
Changes in assets and liabilities, net:
Increase in receivables (57,114) (2,210)
Decrease in prepaid expenses 1,876 15,625
Increase in other assets (7,079) -
Decrease in inventories - 13,384
Decrease in accounts payable (102,349) (191,373)
(Decrease) increase in accrued and other
liabilities (19,028) 5,161
(Decrease) increase in due to bank (13,675) 5,935
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (359,836) (165,696)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES-
Purchases of property and equipment (45,927) (2,155)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,102,500 97,813
Proceeds from issuance of convertible debt - 100,000
Proceeds from issuance of long-term debt - 81,000
Repayments of long-term debt (60,573) (3,506)
Cash paid for stock issuance costs (99,703) (63,701
Repayments of capital lease obligations (101,941) (196)
Repayments of stockholder advances (33,848) (43,559)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES
806,435 167,851
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 400,672 -
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR - -
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 400,672 $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 68,259 $72,374
============= =============
</TABLE>
--------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-13
<PAGE>
COMPETITIVE COMPANIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
Competitive Companies, Inc. (the "Parent") was incorporated under the laws of
the state of Nevada in March 1998. In 1998, the Company acquired all of the
assets and assumed all of the liabilities of Competitive Communications, Inc.
("CCI"), which was incorporated under the laws of the state of California in
February 1996. CCI is the successor to Western Telephone & Television, which was
founded in 1985.
As consideration for the acquisition of CCI, the Parent issued 3,302,700 shares
of its Class A common stock and 1,000,000 shares of its Class A convertible
preferred stock to management and ownership of CCI. Because the management of
CCI and the Parent were effectively the same, the combination has been accounted
for in accordance with an interpretation of Accounting Principles Board Opinion
No. 16, entitled "Transfers and Exchanges Between Companies Under Common
Control." This interpretation requires the assets and liabilities so transferred
to be accounted for at historical cost in a manner similar to that used in
pooling of interests accounting. Accordingly, the accompanying consolidated
financial statements reflect the combination as if it had been completed on
January 1, 1998.
CCI and its Parent (collectively, the "Company") provide telephone, cable
television, long distance/interexchange, and public telephone service to
customers who live in multi-tenant residential buildings. The Company's
operations are located in Riverside, California and approximately 80% of its
customers are California residents.
In addition to the above, in January 2000, the Parent formed CCI Residential
Services, Inc. This entity, which is a wholly owned subsidiary of the Parent,
intends to offer and expand on the residential services currently being provided
by CCI, while CCI will focus on developing revenue streams from other services.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company's financial statements are prepared using the accrual method of
accounting.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Parent and CCI. Significant inter-company balances and transactions have been
eliminated in consolidation.
Revenue Recognition
Revenues are recognized in the month in which the service is provided.
F-14
<PAGE>
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may be
affected by the estimates and assumptions management is required to make. Actual
results could differ significantly from those estimates.
Financial Instruments
The Company believes the book value of their cash and cash equivalents,
receivables, accounts payable and accrued and other liabilities approximates
their fair values due to their short-term nature. In addition, management
believes the book value of their notes payable, long-term debt and capital lease
obligations approximates their fair values as the current interest rates on such
items approximate rates at which similar types of lending and/or borrowing
arrangements could be currently negotiated by the Company.
Long-Lived Assets
The Company periodically reviews its long-lived assets for indications of
impairment. If the value of an asset is considered impaired, an impairment loss
would be recognized. At December 31, 1999, management believes all of its
long-term assets are recoverable.
Property and Equipment
Property and equipment are stated at cost. Major additions are capitalized,
while minor additions and maintenance and repairs which do not extend the useful
life of an asset are expensed as incurred. Depreciation and amortization are
computed using the straight-line method over the assets' estimated useful lives
of five to ten years.
Income Taxes
Income taxes are accounted for under the liability method. Under the liability
method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory rates applicable to future
years to differences between the tax bases of assets and liabilities and their
financial statement carrying amounts. Also, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that included the
enactment date. Temporary differences between financial and taxable reporting
arise primarily from certain stock based compensation (stock based compensation
arising from the Class A Preferred Stock is considered to be a permanent
difference) which is included in the determination of net loss, but is not
reported for tax return purposes until the exercise and or sale of such
securities.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
and receivables. The Company maintains substantially
F-15
<PAGE>
all of its cash and cash equivalents at one FDIC insured institution. At
December 31, 1999, approximately $334,000 of cash and cash equivalents were not
covered by FDIC insurance.
With respect to accounts and unbilled receivables, the Company performs ongoing
credit evaluations of its customers and has certain collection measures in-place
to limit the potential for significant losses. Substantially all of the
receivables included in the accompanying consolidated balance sheet were
recovered subsequent to December 31, 1999.
The Company purchases a significant portion of its local and long distance
telephone line capacity, as well as its cable television capacity from three
vendors. Management performs ongoing negotiations with other vendors and
believes that given the competitive nature of the industry it could obtain
similar agreements with other vendors.
A significant portion of the Company's revenues are derived from agreements
which give the Company the right to sell telephone and cable television service
to the tenants of various apartment complexes. The agreements, which expire
between 2003 and 2005, require the Company to pay a commission up to 11% of
telephone and cable television revenue to the applicable apartment complex
owner.
Advertising
Advertising costs are expensed as incurred.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 established reporting and disclosure requirements for
comprehensive income and its components within the financial statements. The
Company's comprehensive income components during the years ended December 31,
1998 and 1999 was not significant.
Loss Per Common Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards Board Statement No. 128 "Earnings per Share"
("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the
provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed by
dividing the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the periods. The
weighted average number of common shares outstanding during the years ended
December 31, 1999 and 1998 approximated 4,118,000 and 3,313,000, respectively.
Diluted net loss per share is computed by dividing the net loss for the period
by the number of common and common equivalent shares outstanding during the
period. Common stock equivalents existing at December 31, 1999 and 1998 are not
included in the per share calculations because they are anti-dilutive.
The following table reflects the total number of common shares which were issued
(in the case of Convertible Debt - see Note E) or would be issued upon
conversion of the following securities:
F-16
<PAGE>
Cumulative # Cumulative
of Shares as # of Shares as of
of December December 31,
31, 1999 1998
-------------- ------------------
Convertible Debt 0 100,000
Convertible Class A Preferred Stock 20,000,000 5,000,000
Stock Options 5,295,000 4,745,000
Stock-Based Compensation
The Company has adopted SFAS No 123, "Accounting for Stock-Based Compensation"
which requires companies to recognize as expense the fair value of all
stock-based awards on the date of grant, or continue to apply the provisions of
Accounting Principles Board Opinion No. 25 and provide pro-forma net income
(loss) earnings per share disclosure for employee stock option grants and all
other stock-based compensation as if the fair-value-based method defined
in SFAS
123 had been applied. The Company has elected to apply the provisions of SFAS
123.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
NOTE C - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1998 the Company acquired property and
equipment of approximately $34,000 through a capital lease agreement.
During the year ended December 31, 1999, non-cash investing and financing
activities were as follows:
o The Company acquired property and equipment of approximately $207,500
through the issuance of a note payable.
o 100,000 shares of Class A common stock were issued as consideration for
conversion of certain long-term debt having a principal balance of
$100,000.
NOTE D - PROPERTY AND EQUIPMENT-NET
Property and equipment consists of the following at December 31, 1999:
F-17
<PAGE>
Amount
Telecommunications equipment and computers $ 762,040
Vehicles 61,000
Furniture, fixtures and improvements 20,216
--------------
843,256
Less accumulated depreciation and amortization 203,477
--------------
Property and equipment-net $ 639,779
==============
NOTE E - STOCKHOLDERS' EQUITY
In addition to the issuance of common and preferred shares issued in connection
with the acquisition of CCI, (see Note A), in 1998 the Company issued 82,000
shares of its common stock at a price of $1.00 per share pursuant to a private
placement of securities. During the year ended December 31, 1999, common and
preferred shares were issued as follows:
Class A Common Stock
o 855,000 shares were sold for $1.00 per share pursuant to a private placement
of securities.
o 383,852 shares were sold for $305,000 (an average of approximately $0.80 per
share) pursuant to a private placement of securities. Because the fair value
of the stock at such time was considered to be $1.00 per share, the discount
of $0.20 per share, or $78,852, was recorded as stock-based compensation
expense in the accompanying consolidated statement of operations.
o 119,425 shares were issued in exchange for services provided to the Company.
Because the fair value of the stock at the time was considered to be $1.00
per share, $119,425 has been recorded as stock-based compensation expense in
the accompanying consolidated statement of operations.
o 100,000 shares were issued as consideration for conversion of certain
long-term debt having a principal balance of $100,000. In addition, the
Company issued 9,084 shares to an investor as consideration for interest
expense. In connection with the conversion of such debt, the Company has
agreed to register its shares through a filing with the Securities and
Exchange Commission and to issue additional shares to such holders if the
initial opening price is below $3.00.
Class A Convertible Preferred Stock
3,000,000 shares of Class A Convertible Preferred Stock were issued to various
founding stockholders and management in December 1999. Upon the occurrence of
certain events, these shares are convertible into 15,000,000 shares of common
stock; accordingly, $15,000,000 of stock based compensation has been recorded as
of December 31, 1999. Conversion may occur at any time, in whole or in part up
to the percentage associated with the achievement of certain future events for a
period commencing on the date such event was achieved and ending on December 31,
2010.
F-18
<PAGE>
The conversion rate is subject to proportional adjustment in the event of a
stock split, stock dividend or similar recapitalization event effecting such
shares. Holders of the preferred shares are not entitled to preferential
dividend rights, redemption or voting rights, except as may be required by law.
Incentive and Non-Statutory Stock Option Plan
The Board of Directors has reserved 7,500,000 shares of its common stock for
issuance under its Incentive and Non-Statutory Stock Option Plan (the "Plan").
Generally, incentive options are granted at an exercise price equal to the fair
value of the Company's common stock (as determined by the Board of Directors) at
the date of grant. In accordance with the provisions of SFAS 123, 500,000
options issued in 1999 to certain consultants for services rendered have
resulted in the Company recording $245,000 of stock-based compensation in the
accompanying 1999 consolidated statement of operations.
Incentive options require two-years of continued employment before exercise, and
have 20% vesting schedules thereafter, in which full vesting occurs immediately
prior to the expiration of five years following the date the incentive option is
granted. As such, none of the options listed below were vested and/or
exercisable at December 31, 1999 or 1998.
Options Outstanding
-----------------------------------
Number of Shares Price Per Share
Optionns outstanding at January 1,
1998 0
Options granted at date of
incorporation 4,745,000 $ 0.001
------------------ ---------------
Options outstanding at December 31,
1998 4,745,000 0.001
Options granted 200,000 0.001
Options granted 300,000 0.85
Options granted 50,000 1.00
------------------ ---------------
Options outstanding at December 31,
1999 5,295,000 $0.001 to 1.00
================== ===============
Each of the options expires on the earlier of the date specified in the option
agreement, or the tenth anniversary of the date of grant. Any incentive option
not subject to this provision is designated as being a non-statutory option.
Whenever an outstanding option is terminated (other than by exercise), the
shares of common stock relating to such option are to be restored to the Plan
and be available for the grant of other options under the Plan.
NOTE F- LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1999:
Note payable to Frontier Communications Services, Inc.,
bearing interest at 10% with monthly principal and interest
payments of $3,500 through March 15, 2003. The note is
secured by the telecommunications equipment purchased with the
proceeds of the note. $ 98,472
F-19
<PAGE>
Note payable to Frontier Communications Services, Inc.,
bearing interest at 10% with monthly principal and interest
payments of $3,000 through June 25, 2001. The note is secured
by the telecommunications equipment purchased with the 59,415
proceeds of the note.
Unsecured note payable to stockholder, bearing interest at 11.5%
and requiring monthly principal and interest installments of
$684.44 through October 23, 2014. 57,901
Note payable to GST Universal, Inc. requiring interest
payments only of $1,728.75 (at 10%) through May 10, 2004 at
which time all principal and unpaid interest is due in full.
The note is secured by the telecommunications equipment 207,450
purchased with the proceeds of the note.
Other Notes 8,300
----------
431,540
Less current maturities 70,728
----------
Long-term debt $ 360,812
==========
Scheduled maturities of long-term debt as of December 31, 1999 are as follows:
Years Ending
December 31, Amounts
2000 $ 70,728
2001 58,547
2002 35,820
2003 8,794
2004 210,450
Thereafter 47,201
-----------
Total $ 431,540
===========
NOTE G- OTHER RELATED PARTY TRANSACTIONS
The Company periodically borrows funds from various stockholders. At December
31, 1999, advances from stockholders were $35,766. The advances are unsecured,
non-interest bearing and due on demand.
The Company provides billing, collection and certain other administrative
services, as well as certain telephone and cable services, to Huntington
Telecommunications Partners, L.P. ("HTP"), a California limited partnership in
which the Company has a 5% limited partnership interest. As consideration for
such services, the Company received approximately $108,000 for the year ended
December 31, 1999. Additionally, the Company sold $242,000 in long distance
services to HTP during the year ended December 31, 1999.
F-20
<PAGE>
NOTE H- INCOME TAXES
During the years ended December 31, 1999 and 1998, the Company recognized losses
for both financial and tax reporting purposes. Accordingly, no provision for
income taxes has been included in the accompanying consolidated statements of
operations. The significant components of the Company's deferred income tax
asset as of December 31, 1999, assuming an effective income tax rate of 39%, are
approximately as follows:
Stock-based compensation $ 173,000
Net operating loss carryforwards 248,500
------------
421,500
Valuation allowance (421,500)
------------
Deferred income tax asset - net $ 0
============
The Company established a valuation allowance to fully reserve the net deferred
income tax asset as of December 31, 1999 as the realization of the asset did not
meet the required asset recognition standard established by SFAS 109. As a
result thereof, no benefit for income taxes has been recorded in the
accompanying consolidated statement of operations.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $637,000 for income tax purposes. These carryforwards expire at
various times through the year ended December 31, 2019.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases its operating facility under a non-cancelable operating
lease. Future minimum lease payments required are approximately as follows:
Years Ending
December 31, Amounts
2000 $ 25,300
2001 26,300
2002 20,300
------------
Total $ 71,900
============
Total rent expense for 1999 and 1998 approximated $18,300 and $20,550,
respectively.
The Company is also obligated under various capital leases. Future minimum lease
payments required under such leases are as follows:
F-21
<PAGE>
Years Ending
December 31, Amounts
2000 $ 98,259
2001 107,370
2002 36,945
------------
Total minimum lease payments 242,574
Less amount representing interest 43,356
------------
Present value of future minimum lease payments 199,218
Less current maturities 81,761
------------
Capital lease obligations - net of current maturities $ 117,457
============
Employment Agreements
The Company has entered into five-year employment agreements with its President
and Secretary which require initial annual base salary of approximately $77,000
and $68,000 respectively, and unless earlier terminated thereto, are subject to
automatic extension for an additional period of two years. The officers' annual
base salaries will be increased to $130,000 and $115,000, respectively if the
Company is able to raise $1,000,000 of investment proceeds.
In addition to their annual base salary, both of the executives are entitled to
amounts under an executive bonus plan in any fiscal year in which earnings
before taxes and charitable contributions ("PT-PC") of the Corporation is
$1,000,000 or more. Under the plan, 6% of the PT-PC is available for executive
officers and an additional 6% for non-executive officers to be paid as cash
bonuses no less often than annually. Through December 31, 1999, no amounts have
been awarded under this plan.
Litigation
The Company is involved in certain arbitration with Personal Communications
Spectrum V; an entity in which it has a 10% ownership interest (the "Claimant").
Pursuant to terms of a purchase and sale agreement, the Claimant was obligated
to purchase certain cable television and telephone systems (the "Systems")
having a cost of approximately $460,000. However, because the Claimant failed to
pay the entire purchase price, and fulfill its other obligations under the
purchase and sale agreement, the Company has paid approximately $57,000 of
System costs and, in addition, incurred approximately $85,000 of costs arising
from the maintenance and operation of the Systems. As a result thereof, the
Company has asserted their rights to ownership of the Systems, and the Claimant
is seeking to recover approximately $403,000 of costs it incurred for the
Systems.
The parties have tentatively reached a settlement agreement whereby in exchange
for full title to the Systems, the Company will pay cash and issue to the
Claimant shares of its Class A common stock. Because management believes that
such consideration will approximate the fair market value of the Systems, and
because some uncertainty remains regarding the ultimate resolution of the matter
(e.g. as a condition precedent to finalizing the settlement agreement, the
Company will require liability releases from each of the Claimant's investors),
no effect has been given to this proposed settlement transaction in the
accompanying consolidated financial statements.
NOTE J- SUBSEQUENT EVENTS
Proposed Common Stock Registration
F-22
<PAGE>
The Company has entered into an agreement to merge with Third Enterprise Service
Group, Inc. ("TESG"). Pursuant to terms of the merger, the Company's
stockholders would receive an equal number of shares in TESG, and the
stockholder of TESG would retain less than 5% of the Company's outstanding stock
after the merger. TESG is an acquisition company with no operations or assets.
In December 1999, a registration statement was filed with the Securities and
Exchange Commission for the registration of all the Company's outstanding shares
after giving effect to this merger. An amendment is expected to be filed during
2000.
Merger with Huntington Telecommunications Partners, L.P. ("HTP")
In February 2000, the Company and TESG agreed to merge with HTP. The merger is
anticipated to close on June 30, 2000. As discussed in Note G, the Company
provides management and administrative services to HTP, as well as telephone and
cable service.
--------------------------------------------------------------------------------
F-23
<PAGE>
HUNTINGTON TELECOMMUNICATIONS
PARTNERS, L.P.
Financial Statements as of
and for the three and six months ended
June 30, 2000 and 1999
(Unaudited)
TABLE OF CONTENTS
-------------------------------------------------------------------------------
Page
Balance Sheet F-25
Statements of Operations F-26
Statement of Partners' Capital F-27
Statements of Cash Flows F-28
Notes to Financial Statements F-29
------------------------------------------------------------------------------
F-24
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
BALANCE SHEETS AS OF
-------------------------------------------------------------------------------
June 30,
2000 December 31,
Unaudited 1999
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 60,236 $ 83,244
Accounts receivable, net of allowance for
doubtful accounts of $64,000 and $60,000 56,425 70,925
------------ -----------
Total current assets 116,661 154,169
TELECOMMUNICATIONS EQUIPMENT AND COMPUTERS
(net of accumulated depreciation and
amortization of $941,803 and $892,797) 131,693 178,363
------------ -----------
TOTAL $ 248,354 $ 332,532
============ ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES-
Accounts payable $ 65,083 $ 55,023
PARTNERS' CAPITAL 183,271 277,509
------------ -----------
TOTAL $ 248,354 $ 332,532
============ ===========
--------------------------------------------------------------------------------
See notes to financial statements.
F-25
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------------
Three- Three-
Six-Months Six-Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- ------------ ---------- -----------
REVENUES $ 349,262 $ 363,697 $ 173,625 $ 179,877
--------- ------------ ---------- -----------
OPERATING EXPENSES:
Phone and cable services 273,277 251,575 141,362 124,719
Administration fees -
related party 40,658 40,974 19,978 21,556
Depreciation and
amortization 49,006 48,669 24,503 24,977
Commissions 24,427 24,839 12,045 13,135
Management fees -
related party 10,436 10,757 5,197 5,388
Provision for bad debts 4,000 6,520 4,000 4,000
Other 41,696 45,692 34,769 3,164
----------- ---------- ----------- -----------
443,500 429,026 241,854 196,939
----------- ---------- ----------- -----------
NET LOSS $ (94,238) $ (65,329) $ (68,229) $ (17,062)
=========== ========== =========== ===========
-------------------------------------------------------------------------------
See notes to financial statements.
F-26
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
STATEMENT OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------- -------------- -------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1999 $ (189,998) $ 467,507 $ 277,509
Net loss (23,560) (70,678) (94,238)
------------- -------------- -------------
BALANCES, JUNE 30, 2000 $ (213,558) $ 396,829 $ 183,271
============= ============== =============
</TABLE>
--------------------------------------------------------------------------------
See notes to financial statements.
F-27
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three- Three-
Six-Months Six-Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ---------- -------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ (94,238) $(65,329) $(68,229) $(17,062)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 49,006 48,669 24,503 24,977
Provision for bad debts 4,000 6,520 4,000 4,000
Changes in current assets and liabilities:
Decrease (increase) in
accounts receivable 10,500 7,284 (1,986) (5,756)
Increase (decrease) in
accounts payable 10,060 7,908 23,725 (15,395)
----------- ---------- -------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 20,672 5,052 (17,987) (9,236)
----------- ---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of equipment (2,336) - (419) -
----------- ---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES -
Distributions to partners - - - -
----------- ---------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (23,008) 5,052 (18,406) (9,236)
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 83,244 29,057 78,642 43,345
----------- ---------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF THE
PERIOD $ 60,236 $ 34,109 $60,236 $ 34,109
=========== ========== ======== =========
</TABLE>
--------------------------------------------------------------------------------
See notes to financial statements.
F-28
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
--------------------------------------------------------------------------------
NOTE A - FORMATION AND NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Huntington Telecommunications Partners, L.P. (the "Partnership") was formed as a
limited partnership under the laws of the state of California on February 11,
1994. The Partnership, which provides telephone and cable television hookups for
four apartment complexes located in the cities of Fremont, Hayward, Fair Oaks
and San Jose, California, owns wiring, telephone switching equipment, and
satellite reception equipment located within each apartment complex. Pursuant to
applicable federal and state law, tenants have the right to use a telephone
service provider other than the Partnership. Tenants do not have a right to
utilize another cable television provider other than the Partnership.
The Partnership's operating and capital structure are governed by a Limited
Partnership Agreement (the "Agreement") between KBL Investment Company, L.P.
("KBL" or the "General Partner") and various limited partners (the "Limited
Partners"), who have the made capital contributions, and have partnership
interests, as follows:
Partnership Capital
Interest Contributions
The General Partner 25.0% -
The Limited Partners 75.0% $1,250,000
Pursuant to terms of the Agreement, operating and capital losses are allocated
among the General and Limited Partners (collectively the "Partners") in
accordance with their respective partnership interests. Operating income and
capital gains are to be allocated to the Partners as follows: (1) in proportion
to their partnership interests until such allocations exceed prior losses; (2)
1% to the General Partner, and 99% to Limited Partners until they have received
a cumulative non-compounded 10% preferred return on their net investor capital
and (3) in proportion to their respective partnership interests. The preferred
return will be accounted for as a reclassification of capital between the
General and Limited Partners accounts if and when the General Partner has
available basis. The cumulative preferred cash return not paid and or
transferred between the Partners' capital accounts approximated $615,000 at
December 31, 1999.
Cash generated from operations is distributable to the Partners in the following
priority: (1) 1% to the General Partner, and 99% to Limited Partners until they
have received a cumulative non-compounded 10% preferred return on their net
investor capital and (2) in
F-29
<PAGE>
proportion to their respective partnership interests. The Agreement contains
different distribution priorities if distributions result from a
"Non-Terminating Capital Transaction" (as defined), or arise from the original
incurrence or refinancing of any indebtedness.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the
Company have bee prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-QSB
and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission
("SEC"). Accordingly, the financial statements do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results for the year ended December 31, 2000. The
accompanying condensed consolidated financial statements and noted thereto
should be read in conjunction with the Company's audited financial statements as
of December 31, 1999.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may be
affected by the estimates and assumptions management is required to make. Actual
results could differ significantly from those estimates.
NOTE B - RELATED PARTY TRANSACTIONS
KBL provides management services to the Partnership. As consideration for such
services, KBL receives a monthly fee of 3% of the Partnership's revenues. The
total amount expensed, and paid, under this arrangement during the year ended
December 31, 1999 approximated $11,000. In addition to such fees, KBL is
reimbursed for direct costs incurred on behalf of the Partnership; no such costs
were incurred by, and/or reimbursed to KBL by the Partnership during the six
months ended June 30, 2000.
As discussed in Note B, COCO provides all of the Partnership's long distance
services. In turn, COCO purchases all of such services from Qwest
Communications. Total long distance services purchased from COCO approximated
$120,000 during the six months ended June 30, 1999; such amount is included in
phone and cable services in the accompanying statement of operations.
In addition, COCO provides billing, collection and certain other administrative
services, , to the Partnership. As consideration for such services, COCO
received approximately $41,000 for the six months ended June 30, 2000.
F-30
<PAGE>
An affiliate of the general partner provides space for the Partnership at no
charge. No value has been ascribed to such occupancy expenses in the
accompanying statement of operations, as the amounts were not considered
significant.
NOTE C - SUBSEQUENT EVENT
In February 2000, the Partnership, Third Enterprise Service Group, Inc. ("TESG")
and COCO agreed to merge. The merger closed in August 2000. TESG is an
acquisition Company, with no operations or assets.
--------------------------------------------------------------------------------
F-31
<PAGE>
HUNTINGTON TELECOMMUNICATIONS
PARTNERS, L.P.
Financial Statements as of
and for the year ended
December 31, 1999
and
Independent Auditors' Report
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Pages
Independent Auditors' Report F-33
Financial Statements as of and for the year
ended December 31, 1999:
Balance Sheet F-34
Statement of Operations F-35
Statement of Partners' Capital F-36
Statement of Cash Flows F-37
Notes to Financial Statements F-38
--------------------------------------------------------------------------------
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Huntington Telecommunications Partners, L.P.:
We have audited the accompanying balance sheet of Huntington Telecommunications
Partners, L.P. (the "Partnership"), as of December 31, 1999, and the related
statements of operations, partners' capital, and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership'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 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 the Partnership as of December
31, 1999, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Kingery, Crouse & Hohl, P.A.
Tampa, Florida
July 21, 2000
F-33
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
BALANCE SHEET AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 83,244
Accounts receivable, net of allowance for 70,925
doubtful accounts of $60,000
----------
Total current assets 154,169
TELECOMMUNICATIONS EQUIPMENT AND COMPUTERS
(net of accumulated depreciation and
amortization of $892,797) 178,363
----------
TOTAL $ 332,532
==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES-
Accounts payable $ 55,023
PARTNERS' CAPITAL 277,509
----------
TOTAL $ 332,532
==========
--------------------------------------------------------------------------------
See notes to financial statements.
F-34
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------------
REVENUES $ 715,063
--------
OPERATING EXPENSES:
Phone and cable services 447,273
Administration fees - related party 107,854
Depreciation and amortization 99,907
Commissions 46,327
Management fees - related party 21,616
Provision for bad debts 14,520
Other 17,746
--------
755,243
--------
NET LOSS $ (40,180)
========
-------------------------------------------------------------------------------
See notes to financial statements.
F-35
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------- -------------- -------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 $ (179,953) $ 522,642 $ 342,689
Net loss (10,045) (30,135) (40,180)
Distributions - (25,000) (25,000)
------------- -------------- -------------
BALANCES, DECEMBER 31, 1999 $ (189,998) $ 467,507 $ 277,509
============= ============== =============
</TABLE>
--------------------------------------------------------------------------------
See notes to financial statements.
F-36
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (40,180)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 99,907
Provision for bad debts 14,520
Changes in current assets and liabilities:
Increase in accounts receivable (5,562)
Increase in accounts payable 10,502
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 79,187
-----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Distributions to partners (25,000)
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 54,187
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 29,057
-----------
CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 83,244
===========
-------------------------------------------------------------------------------
See notes to financial statements.
F-37
<PAGE>
HUNTINGTON TELECOMMUNICATIONS PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NOTE A - FORMATION AND NATURE OF OPERATIONS
Huntington Telecommunications Partners, L.P. (the "Partnership") was formed as a
limited partnership under the laws of the state of California on February 11,
1994. The Partnership, which provides telephone and cable television hookups for
four apartment complexes located in the cities of Fremont, Hayward, Fair Oaks
and San Jose, California, owns wiring, telephone switching equipment, and
satellite reception equipment located within each apartment complex. Pursuant to
applicable federal and state law, tenants have the right to use a telephone
service provider other than the Partnership. Tenants do not have a right to
utilize another cable television provider other than the Partnership.
The Partnership's operating and capital structure are governed by a Limited
Partnership Agreement (the "Agreement") between KBL Investment Company, L.P.
("KBL" or the "General Partner") and various limited partners (the "Limited
Partners"), who have the made capital contributions, and have partnership
interests, as follows:
Partnership Capital
Interest Contributions
The General Partner 25.0% -
The Limited Partners 75.0% $1,250,000
Pursuant to terms of the Agreement, operating and capital losses are allocated
among the General and Limited Partners (collectively the "Partners") in
accordance with their respective partnership interests. Operating income and
capital gains are to be allocated to the Partners as follows: (1) in proportion
to their partnership interests until such allocations exceed prior losses; (2)
1% to the General Partner, and 99% to Limited Partners until they have received
a cumulative non-compounded 10% preferred return on their net investor capital
and (3) in proportion to their respective partnership interests. The preferred
return will be accounted for as a reclassification of capital between the
General and Limited Partners accounts if and when the General Partner has
available basis. The cumulative preferred cash return not paid and or
transferred between the Partners' capital accounts approximated $615,000 at
December 31, 1999.
Cash generated from operations is distributable to the Partners in the following
priority: (1) 1% to the General Partner, and 99% to Limited Partners until they
have received a cumulative non-compounded 10% preferred return on their net
investor capital and (2) in
F-38
<PAGE>
proportion to their respective partnership interests. The Agreement contains
different distribution priorities if distributions result from a
"Non-Terminating Capital Transaction" (as defined), or arise from the original
incurrence or refinancing of any indebtedness.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's financial statements are prepared using the accrual method of
accounting.
Revenue Recognition
Revenues are recognized in the month in which the service is provided.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may be
affected by the estimates and assumptions management is required to make. Actual
results could differ significantly from those estimates.
Financial Instruments
The Partnership believes the book value of their cash and cash equivalents,
accounts receivable and accounts payable approximates their fair values due to
their short-term nature.
Telecommunications Equipment and Computers
Telecommunications equipment and computers are recorded at cost. Depreciation
and amortization are computed using the double declining method over the assets'
estimated useful lives of seven years. Major repairs or replacements are
capitalized, whereas maintenance, repairs and minor replacements are charged to
operations as incurred.
Long-Lived Assets
The Partnership periodically reviews its long-lived assets for indications of
impairment. If the value of an asset is considered impaired, an impairment loss
would be recognized.
F-39
<PAGE>
At December 31, 1999, management believes all of the Partnership's long-lived
assets are recoverable.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
Income Taxes
No provision or benefit for income taxes is included in the accompanying
financial statements since taxable income or loss passes through to, and is
reportable by, the Partners.
Concentrations of Credit Risk
Financial instruments that potentially subject the Partnership to significant
concentrations of credit risk consist principally of receivables, which
effectively arise from residents of four apartment complexes located in Northern
California. The Partnership performs ongoing credit evaluations of its customers
and has certain measures in place to limit the potential for significant losses.
Substantially all of the net receivables included in the accompanying balance
sheet were recovered subsequent to December 31, 1999.
The Partnership purchases all of its local telephone line capacity from Pacific
Bell, all of its long distance line capacity from Competitive Companies, Inc.
("COCO"), a 20% partner in KBL (see Note C) and all of its cable television
capacity from Netlink International.
NOTE C - RELATED PARTY TRANSACTIONS
KBL provides management services to the Partnership. As consideration for such
services, KBL receives a monthly fee of 3% of the Partnership's revenues. The
total amount expensed, and paid, under this arrangement during the year ended
December 31, 1999 approximated $21,000. In addition to such fees, KBL is
reimbursed for direct costs incurred on behalf of the Partnership; no such costs
were incurred by, and/or reimbursed to KBL by the Partnership during the year
ended December 31, 1999.
As discussed in Note B, COCO provides all of the Partnership's long distance
services. In turn, COCO purchases all of such services from Qwest
Communications. Total long distance services purchased from COCO approximated
$242,000 during the year ended December 31, 1999; such amount is included in
phone and cable services in the accompanying statement of operations.
F-40
<PAGE>
In addition, COCO provides billing, collection and certain other administrative
services, , to the Partnership. As consideration for such services, COCO
received approximately $108,000 for the year ended December 31, 1999.
An affiliate of the general partner provides space for the Partnership at no
charge. No value has been ascribed to such occupancy expenses in the
accompanying statement of operations, as the amounts were not considered
significant.
NOTE D - COMMITMENTS
The Partnership has agreements with four apartment complexes giving it the right
to sell telephone and cable television service to the tenants of the apartment
complexes. Each agreement requires that the Partnership pay a commission,
currently between 8% and 10% of telephone revenue and 10% of cable television
revenue, to the apartment complex owner. The agreements expire between 2003 and
2005.
NOTE E - SUBSEQUENT EVENT
In February 2000, the Partnership, Third Enterprise Service Group, Inc. ("TESG")
and COCO agreed to merge. The merger is anticipated to close in July 2000. TESG
is an acquisition Company, with no operations or assets.
--------------------------------------------------------------------------------
F-41
<PAGE>
THIRD ENTERPRISE SERVICE GROUP, INC.
INDEX TO JUNE 2000 QUARTERLY FINANCIAL STATEMENTS
Financial Statements (unaudited)
Balance Sheets as of June 30, 2000 and December 31, 1999....... F-43
Statements of Operations for the three and six month periods
ended June 30, 2000 and the period April 6, 1999
(date of incorporation) to June 30, 1999 and 2000............. F-44
Statement of Stockholders' Equity for the six months
ended Juen 30, 2000............................................ F-45
Statement of Cash Flows for the three and six months ended
June 30, 2000 and the period April 6, 1999 (date of
incorporation) to June 30, 1999 and 2000..................... F-46
Notes to Financial Statements.................................. F-47
F-42
<PAGE>
THIRD ENTERPRISE SERVICE GROUP, INC.
(A Development Stage Enterprise)
BALANCE SHEET
---------------------------------------------------------------------------
June 30, December
2000 31, 1999
ASSETS (Unaudited) (Unaudited)
------ ----------- -----------
TOTAL ASSETS $ - $ -
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
TOTAL LIABILITIES $ - $ -
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock - no par value: 50,000,000 shares
authorized; 1,000,000 shares issued and
outstanding 79 79
Preferred stock - no par value: 20,000,000
shares authorized; no shares issued and
outstanding - -
Additional paid in capital 6,000 4,000
Deficit accumulated during the development stage (6,079) (4,079)
----------- -----------
Total stockholders' equity - -
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ - $ -
=========== ===========
---------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
F-43
<PAGE>
THIRD ENTERPRISE SERVICE GROUP, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(Unaudited)
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Period
April 6, April 6,
Six Three 1999 (date 1999 (date
Months Months of of
Ended Ended incorporation)incorporation)
June 30, June 30, to June to June
2000 2000 30, 1999 30, 2000
--------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
EXPENSES:
Professional fees and expenses $ 2,000 $ 1,000 $ 2,000 $ 6,000
Organizational costs - - 79 79
--------- ----------- ------------- -------------
NET LOSS $ 2,000 $ 1,000 $ 2,079 $ 6,079
========= =========== ============= =============
NET LOSS PER SHARE $ 0.00 $ 0.00 $ 0.00 $ 0.00
========= =========== ============= =============
</TABLE>
---------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
F-44
<PAGE>
THIRD ENTERPRISE SERVICE GROUP, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 2000
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulaated
Additional During the
Common Stock Paid in Development
Shares Value Capital Stage Total
--------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances,December 31, 1999 1,000,000 $ 79 $ 4,000 $ (4,079) $ -
Capital Contribution of Services - - 2,000 - 2,000
Net loss for the six
months ended June 30, 2000 - - - (2,000) (2,000)
--------- -------- ---------- ------------ -----------
Balances June 30, 2000 1,000,000 $ 79 $ 6,000 $ (6,079) $ -
========= ========= ========== ============ ===========
</TABLE>
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
F-45
<PAGE>
THIRD ENTERPRISE SERVICE GROUP, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Period
April 6, April 6,
Six Three 1999 (date 1999 (date
Months Months of of
Ended Ended incorporation) incorporation)
June 30, June 30, to June to June
2000 2000 30, 1999 30, 2000
--------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,000) $ (1,000) $ (2,079) $ (6,079)
Adjustments to reconcile net loss to
cash used in operating activities -
Contributed services and expenses 2,000 1,000 2,000 6,000
---------- ---------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES - - (79) (79)
---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock - - 79 79
---------- ---------- ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES - - 79 79
---------- ---------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - - -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - - - -
---------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ - $ - $ -
========== ========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ - $ - $ - $ -
========== ========== =========== ===========
Taxes paid $ - $ - $ - $ -
========== ========== =========== ===========
</TABLE>
-------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
F-46
<PAGE>
THIRD ENTERPRISE SERVICE GROUP, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
------------------------------------------------------------------------------
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
Third Enterprise Service Group, Inc., (we", "us", "our") was incorporated under
the laws of the state of Florida on April 6, 1999. We are considered to be in
the development stage, as defined in Financial Accounting Standards Board
Statement No. 7. We intend to investigate and, if such investigation warrants,
engage in business combinations. Our planned principal operations have not
commenced, therefore accounting policies and procedures have not yet been
established.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Our accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principals for interim financial information
and the instructions to Form 10-QSB and Rule 10-1 of Regulation S-X of the
Securities and Exchange Commission (the "SEC"). Accordingly, these financial
statements do not include all of the footnotes required by generally accepted
accounting principals. In the opinion of management, all adjustments (consisting
of normal and recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. We have an accumulated deficit of
$6,079 as of June 30, 2000. We do not currently engage in business activities
that provide any cash flow, accordingly our ability to continue as a going
concern is dependent on our management's ability to fund our cash requirements
until a business combination is closed. These factors among others may indicate
that we will be unable to continue as a going concern for a reasonable period of
time.
The financial statements do not include any adjustments that might be necessary
if we are unable to continue as a going concern.
NOTE C - INCOME TAXES
During the period April 6, 1999 (date of incorporation) to June 30, 2000, we
recognized losses for both financial and tax reporting purposes. Accordingly, no
deferred taxes have been provided for in the accompanying statement of
operations.
NOTE D - RELATED PARTY TRANSACTION
Our President, who is also a shareholder, has agreed, in writing, to fund all of
our expenses until such time as an acquisition transaction is closed. None of
these funds expended on our behalf will be reimbursable to our President,
accordingly these amounts will be reflected in our financial statements as
contributed capital.
F-47
<PAGE>
NOTE E - PROPOSED MERGER
The Company has entered into a merger agreement with Competitive Companies, Inc.
("Coco")and Huntington Telecommunications Partners, L.P. ("HTP") which it
anticipates will close in the year 2000. In conjunction with the merger the
Company has agreed to effect a reverse stock split whereby the stockholder
of the Company will retain 125,000 shares outstanding after such.
------------------------------------------------------------------------------
F-48
<PAGE>
Ninth Enterprise Service Group, Inc.
Prospectus
TABLE OF CONTENTS
SUMMARY........................................................................4
RISK FACTORS..................................................................14
MERGER AND ASSET PURCHASE APPROVALS...........................................20
MERGER AND ASSET PURCHASE TRANSACTIONS.......................................20
COMPETITIVE COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................29
COMPETITIVE COMPANIES BUSINESS................................................34
Business Strategy.............................................................35
Market Opportunity............................................................40
Competitive Companies Telecommunications Services.............................40
Sales And Customer Support....................................................42
Information Systems...........................................................42
Network Deployment............................................................44
Network Architecture..........................................................44
Implementation Of Services....................................................45
Regulation....................................................................46
Competition...................................................................50
Employees.....................................................................52
Legal Proceedings.............................................................53
Facilities....................................................................53
COMPETITIVE COMPANIES' MANAGEMENT.............................................53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................58
PRINCIPAL STOCKHOLDERS........................................................58
Name..........................................................................58
Number of Shares..............................................................58
Percentage before Merger......................................................58
Percentage after Merger.......................................................58
DESCRIPTION OF COMPETITIVE COMPANIES CAPITAL STOCK............................59
ACQUISITION OF ASSETS FROM....................................................63
HUNTINGTON TELECOMMUNICATIONS PARTNERS, LP....................................63
THIRD ENTERPRISE SERVICE GROUP'S BUSINESS.....................................63
DESCRIPTION OF THIRD ENTERPRISE SERVICE GROUP'S CAPITAL STOCK.................67
COMPARISON OF RIGHTS OF THIRD ENTERPRISE SERVICE GROUP STOCKHOLDERS AND
COMPETITIVE COMPANIES SHAREHOLDERS.........................................68
AVAILABLE INFORMATION.........................................................68
LEGAL MATTERS.................................................................69
Dealer prospectus delivery obligation
Until , all dealers that effect transactions in these securities, whether or not
participating in this offering, are required to deliver a prospectus.
The date of this prospectus is **.
70
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Florida Business Corporation Act. Section 607.0850(1) of the Florida
Business Corporation Act (the "FBCA") provides that a Florida corporation, such
as the Company, shall have the power to indemnify any person who was or is a
party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise against liability incurred in connection with such proceeding,
including any appeal thereof, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 607.0850(2) of the FBCA provides that a Florida corporation
shall have the power to indemnify any person, who was or is a party to any
proceeding by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee, or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses and amounts paid in
settlement not exceeding, in the judgment of the board of directors, the
estimated expense of litigating the proceeding to conclusion, actually and
reasonably incurred in connection with the defense or settlement of such
proceeding, including any appeal thereof. Such indemnification shall be
authorized if such person acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be made under this subsection in respect of
any claim, issue, or matter as to which such person shall have been adjudged to
be liable unless, and only to the extent that, the court in which such
proceeding was brought, or any other court of competent jurisdiction, shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
Section 607.850 of the FBCA further provides that: (i) to the extent
that a director, officer, employee or agent of a corporation has been successful
on the merits or otherwise in defense of any proceeding referred to in
subsection (1) or subsection (2), or in defense of any proceeding referred to in
subsection (1) or subsection (2), or in defense of any claim, issue, or matter
therein, he shall be indemnified against expense actually and reasonably
incurred by him in connection therewith; (ii) indemnification provided pursuant
to Section 607.0850 is not exclusive; and (iii) the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under Section 607.0850.
Notwithstanding the foregoing, Section 607.0850 of the FBCA provides
that indemnification or advancement of expenses shall not be made to or on
behalf of any director, officer, employee or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute: (i) a violation of the
criminal law, unless the director, officer, employee or agent had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful; (ii) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (iii) in the case of a
71
<PAGE>
director, a circumstance under which the liability provisions regarding unlawful
distributions are applicable; or (iv) willful misconduct or a conscious
disregard for the best interests of the corporation in a proceeding by or in the
right of the corporation to procure a judgment in its favor or in a proceeding
by or in the right of a shareholder.
Section 607.0831 of the FBCA provides that a director of a Florida
corporation is not personally liable for monetary damages to the corporation or
any other person for any statement, vote, decision, or failure to act, regarding
corporate management or policy, by a director, unless: (i) the director breached
or failed to perform his duties as a director; and (ii) the director's breach
of, or failure to perform, those duties constitutes: (A) a violation of criminal
law, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful; (B) a
transaction from which the director derived an improper personal benefit, either
directly or indirectly; (C) a circumstance under which the liability provisions
regarding unlawful distributions are applicable; (D) in a proceeding by or in
the right of the corporation to procure a judgment in its favor or by or in the
right of a shareholder, conscious disregard for the best interest of the
corporation, or willful misconduct; or (E) in a proceeding by or in the right of
someone other than the corporation or a shareholder, recklessness or an act or
omission which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton and willful disregard of human rights, safety, or
property.
Articles and Bylaws. The Company's Articles of Incorporation and the
Company's Bylaws provide that the Company shall, to the fullest extent permitted
by law, indemnify all directors of the Company, as well as any officers or
employees of the Company to whom the Company has agreed to grant
indemnification.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Item # Description
------------- ----- ------------------------------------------------------------
2.1 * Plan of Merger COCO & MTW entity
2.2 Asset purchase agreement with Huntington Partners
3.1a Articles of MTW entity
3.11a By-laws of MTW entity
3.1b * Amended Articles
3.11b * Amended By-laws
4.1 Rights and preferences of Preferred Stock
5.1 Legal Opinion - MTW
8.1 * Tax Opinion - MTW
10.01 Partnership Agreement - D Greens
10.02 Partnership Agreement - A Gardens
10.03 Partnership Agreement - C.Hills
10.04 Partnership Agreement - Rollingwood
10.05a Partnership Agreement - Trussville
10.05b Supply, Service and Management Agreement Trussville
10.06a Acquisition agreement - GST
10.06b Acquisition agreement - GST
10.06c Acquisition agreement - GST
10.07 Employment Agreement - L. Halstead
10.08 Employment Agreement - D. Kline, Sr.
10.09 Employment Agreement - D. Kline II
72
<PAGE>
10.10 Agreement with LCI Quest
10.11 Agreement with Inet
10.12 Sample Option Agreement - employees
10.13 Sample Option Agreement - consultants
10.14a Sample Subscription Agreement - Common Stock
10.15 Lease Agreement - Office
10.16 CLEC License approval Letter - MS
10.17 CLEC License approval Letter - CA
10.18 Convertible Note - T. Baba & addendum
10.19 OPEN
10.20 Sample Note Conversion Addendum
10.21 Master Option Agreement
23.1 Consent of Accountants - KCH
23.2 Consent of Accountants - KCH
23.3 Consent of Counsel (See exhibit 5 above)
99.1
- ---------------
*To be provided by amendment
All other Exhibits called for by Rule 601 of Regulation S-1 are not
applicable to this filing.
Information pertaining to our Common Stock is contained in our Articles of
Incorporation and By-Laws.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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 Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant 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 Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to:
1.File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
i.Include any prospectus required by section 10(a)(3) of the
Securities Act;
ii.Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and Notwithstanding the forgoing, any increase
or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and
any deviation From the low or high end of the estimated maximum
73
<PAGE>
offering range may be reflected in the form of prospects filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
the volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement. iii.Include any
additional or changed material information on the plan of distribution.
2.For determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
3.File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
on October 27, 2000.
Third Enterprise Service Group, INC.
By: /s/ MICHAEL T. WILLIAMS.
------------------------------------
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael T. Williams President and Treasurer October 27, 2000
74
<PAGE>
<TABLE>
<CAPTION>
----------- ------------------------------------------------------------------- -------------
Item # Description Page #
----------- ------------------------------------------------------------------- -------------
<S> <C> <C>
2.1 Plan of Merger COCO & MTW entity TBPBA
2.2 Asset Purchase Agreement
3.1a Articles of MTW entity
3.11a By-laws of MTW entity
3.1b Amended Articles TBPBA
3.11b Amended By-laws TBPBA
4.1 Rights and preferences of Preferred Stock
5.1 Legal Opinion - MTW
8.1 Tax Opinion - MTW TBPBA
10.01 Partnership Agreement - D Greens
10.02 Partnership Agreement - A Gardens
10.03 Partnership Agreement - C.Hills
10.04 Partnership Agreement - Rollingwood TBPBA
10.05a Partnership Agreement - Trussville
10.5b Supply, Services and Management Agreement Trussville
10.06a Acquisition agreement - GST
10.6b Acquistion Agreement-GST
10.6c Acquistion Agreement-GST
10.07 Employment Agreement - L. Halstead
10.08 OPEN
10.09 Employment Agreement - DK
10.10 Agreement with LCI Quest
10.11 Agreement with Inet
10.12 Sample Option Agreement - employees
10.13 Sample Option Agreement - consultants
10.14 Sample Subscription Agreement - Common Stock
10.15 Lease Agreement - Office
10.16 CLEC License approval Letter - MS
10.17 CLEC License approval Letter - CA
10.18 Convertible Note - T. Baba & addendum
10.19 "OPEN" TBPBA
10.20 Sample Note Conversion Addendum
10.21 Master Option Agreement
23.1 Consent of Accountants - KCH
23.2 Consent of Accountants - KCH
23.3 Consent of Counsel Included in 5
99.1
</TABLE>
<PAGE>
