As filed with the Securities and Exchange Commission on February 28, 2000.
Commission File No. 0-28887
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
TELCO-TECHNOLOGY, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 22-3328734
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) Number)
60 Bowers Lane
Closter, New Jersey 07624
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (201) 768-2310
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value)
TELCO-TECHNOLOGY, INC.
FORM 10-SB/A REGISTRATION STATEMENT
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 4
Item 2. Management's Discussion and Analysis
or Plan of Operation 16
Item 3. Description of Property 17
Item 4. Security Ownership of Certain
Beneficial Owners and Management. 18
Item 5. Directors and Executive Officers,
Promoters and Control Persons 19
Item 6. Executive Compensation 20
Item 7. Certain Relationships and Related Transactions 21
Item 8. Description of Securities 21
PART II
Item 1. Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters 22
Item 2. Legal Proceedings 24
Item 3. Changes in and Disagreements
with Accountants 24
Item 4. Recent Sales of Unregistered Securities 24
Item 5. Indemnification of Directors and Officers 25
PART F/S
PART III
Item 1. Index to Exhibits 26
Item 2. Description of Exhibits 26
AVAILABLE INFORMATION
General
Subsequent to the date of this Registration Statement the
Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
and in accordance therewith will file reports and other information
with the Securities and Exchange Commission (the
"Commission"). Reports and other information filed by the
Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, 13th floor,
New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Branch of the Commission at
450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates.
This Registration Statement, as well as all amendments
thereto and subsequent reports, have been and will be filed
through the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system. Documents filed through EDGAR are publicly
available through the Commission's Web site at
http://www.sec.gov.
The Company has filed with the Commission this Registration
Statement on Form 10-SB (together with all amendments and exhibits
filed or to be filed in connection herewith, the "Registration
Statement") under the Exchange Act, with respect to the Company's
common stock, $.001 par value per share (the "Common Stock").
Statements contained herein as to the contents of any document
are summaries of such documents and, in each instance, reference
is hereby made to the copy of such document filed as an exhibit to
the Registration Statement, and each such statement is
qualified in all respects by such reference. The Registration
Statement may be inspected and copied at the places set forth
above.
The Company's principal executive offices are located
at 60 Bowers Lane, Closter, New Jersey 07624, and its mailing
address is Box 68, Harrington Park, New Jersey 07640. The
Company's telephone number is (201) 768-2310.
Forward-Looking Statements
This Registration Statement contains certain forward-looking
statements that are based upon the beliefs and assumptions of, and
information available to, the management of the Company at the time
such statements are made. Words such as "expects", "anticipates",
"intends", "plans", "believes", "seeks", "estimates", or variations
of such words and similar expressions are intended to identify such
forward-looking statements. The statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed
or forecasted in such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events
or otherwise.
PART I
Item 1. Description of Business.
General Development
Telco-Technology, Inc. (the "Company") was organized under
the laws of the State of Nevada on November 23, 1993 under the name
Haycock Morrison Inc. ("Haycock"). In 1994, Haycock completed the
sale of certain shares ot its Common Stock pursuant to an exemption
provided by Rule 504 of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Securities Act"). On
January 27, 1995, Haycock entered into an acquisition agreement
with Telco Technology, Inc., a Delaware corporation ("Telco").
Pursuant to the terms of the acquisition, Haycock issued 5,000 shares of its
Common Stock which represented 60% of the then outstanding Common Stock of
Haycock.
After giving effect to the above transaction, the Company
ceased all activities as Haycock and changed its name to
Telco-Technology, Inc. The Company continued the business
operations then conducted by Telco of providing long distance
telephone services and computer networks for
voice and data transmissions which operations were primarily
conducted in the State of Massachusetts (the "Massachusetts
Operations"). In 1998, the Company was reorganized as a Delaware
corporation. The Company continued such operations until June
1999.
In June 1999, the Company sold the Massachusetts Operations to
a company affiliated with a former officer and director of the
Company in exchange for the return of 950,000 shares of Common
Stock to the Company, and the assumption of all liabilities of the
Massachusetts Operations. As part of the agreement, the Company
also agreed to forgive all officer loans due from such
individual (which amounted to approximately $118,000). As a result
of the foregoing, the Company has no current business operations.
As such, the Company can now be defined as a "shell" corporation,
whose principal business purpose at this time is to locate and
consummate a merger or acquisition with a private entity. Because
of the Company's current status, in the event the
Company does successfully acquire or merge with an operating
business opportunity, it is likely that the Company's present
shareholders will experience substantial dilution and there will be
a probable change in control of the Company.
The Company is voluntarily filing this Registration Statement
on Form 10-SB in order to make information concerning itself more
readily available to the public. Management believes that being a
reporting company under the Exchange Act could provide a
prospective merger or acquisition candidate with additional
information concerning the Company. In addition, management
believes that this might make the Company more attractive to an
operating business opportunity as a potential business combination candidate.
As a result of filing this Registration Statement, the Company is
obligated to file with the Commission certain interim and periodic
reports including an annual report containing audited financial
statements.
Any target acquisition or merger candidate of the Company will
become subject to the same reporting requirements as the Company
upon consummation of any such business combination. Thus,
in the event that the Company successfully completes an acquisition
or merger with another operating business, the resulting combined
business must provide audited financial statements for
at least the two most recent fiscal years or, in the event that the
combined operating business has been in business less than two
years, audited financial statements will be required from the
period of inception of the target acquisition or merger candidate.
In addition to the foregoing reasons, the Company is
voluntarily filing this Registration Statement to maintain the
Company's quotations on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. (the "NASD"). The
Company's Common Stock is quoted on the OTC Bulletin Board under
the symbol "TTXI." For information concerning these stock
quotations, see Item 9 "Market Price of and Dividends on the
Company's Common Equity and Other Stockholder Matters". Effective
January 4, 1999, the NASD adopted rules and regulations
requiring that prior to any issuer having its securities quoted on
the OTC Bulletin Board of the NASD that such issuer must be a
"reporting issuer" which is required to file reports under
Section 13 or 15(d) of the Exchange Act. The Company is not
currently a "reporting issuer," and this Registration Statement
will bring the Company into compliance with the listing provision
of the OTC Bulletin Board and should prevent the NASD from
"delisting" quotations of the Company's Common Stock. Under the
"phase-in" schedule of the NASD, the Company has until May 3, 2000,
within which to become a "reporting issuer" and to satisfy all
comments of the Commission with respect to this Registration
Statement.
Business of the Company
The Company has no current business operations and no
representation is made, nor is any intended, that the Company will
be able to carry on future business activities successfully.
Further, there can be no assurance that the Company will have the
ability to acquire or merge with an operating business, business
opportunity or property that will be of material value to
the Company.
Management plans to investigate, research and, if justified,
potentially acquire or merge with one or more businesses or
business opportunities. The Company currently has no commitment or
arrangement, written or oral, to participate in any business
opportunity and management cannot predict the nature of any
potential business opportunity it may ultimately consider.
Management will have broad discretion in its search for and
negotiations with any potential business or business opportunity.
The Company has determined to initially limit its search for a
potential business or business opportunity to firms involved or
intending to be involved in the telecommunications
and/or internet industries. In this regard, the Company will not
restrict its search to any specific geographical location, and the
Company may participate in a business venture of virtually any kind
or nature. In addition, the Company may determine at a future
date to seek a potential business or business opportunity in
another industry in the event the Company does not
consummate a transaction with a business or business opportunity in
the telecommunications and/or internet industries.
The discussion of the business under this caption is
purposefully general and not meant to be restrictive of the
Company's virtually unlimited discretion to search for and enter
into potential business opportunities. No assurance can be given,
however, that any transaction will in fact be consummated.
Management anticipates that it may be able to participate in
only one potential business venture, due primarily to the Company's
limited financing. This lack of diversification should be
considered a substantial risk to the Company because it will not
permit the Company to offset potential losses from one venture
against gains from another.
The Company may seek a business opportunity in the form of
firms which have recently commenced operations, or which wish to
utilize the public marketplace in order to raise
additional capital in order to expand into new products or markets,
to develop a new product or service, or for other corporate
purposes. In some instances, a business opportunity may involve
the acquisition or merger with a company which does not need
substantial additional cash but which desires to establish a public
trading market for its Common Stock. A company which seeks
the Company's participation in attempting to consolidate its
operations through a merger, reorganization, asset acquisition, or
some other form of combination may desire to do so to
avoid what it may deem to be adverse consequences of undertaking a
public offering itself. Factors considered may include time
delays, significant expense, loss of voting control and the
inability or unwillingness to comply with various federal and
state laws enacted for the protection of investors.
The Company anticipates that the selection of a business
opportunity in which to participate will be complex and extremely
risky. Because of general economic conditions, rapid
technological advances being made in some industries, and shortages
of available capital, management believes that there are numerous
firms seeking even the limited additional capital
which the Company will have and/or the benefits of a publicly
traded corporation. Such perceived benefits of a publicly traded
corporation may include facilities or improving the terms on which
additional equity financing may be sought, providing liquidity for
the principals of a business, creating a means for providing
incentive stock options or similar benefits to key employees,
providing liquidity (subject to restrictions of applicable
statutes) for all shareholders, and other factors. Potentially
available business opportunities may occur in many different
industries and at various stages of development, all of which
will make the task of comparative investigation and analysis of
such business opportunities extremely difficult and
complex.
The Company has insufficient capital with which to provide
the owners of business opportunities with any significant cash or
other assets. However, management believes the Company will offer
owners of business opportunities the opportunity to acquire a
controlling ownership interest in a public company at substantially
less cost than is required to conduct an initial public offering.
The owners of the business opportunities will, however, incur
significant post-merger or acquisition registration costs in the
event they wish to register a portion of their shares for
subsequent sale. The Company will also incur significant legal and
accounting costs in connection with the acquisition of a business
opportunity including the costs of preparing Form 8-K's, agreements
and related reports and documents. Nevertheless, management
of the Company has not conducted market research and is not aware
of statistical data which would support the perceived benefits of a
merger or acquisition transaction for the owners of a
business opportunity.
Evaluation of Opportunities
The analysis of new business opportunities will be undertaken
by or under the supervision of the Company's Chairman of the Board,
who is not a professional business analyst. Management
intends to concentrate on identifying preliminary prospective
business opportunities which may be brought to its attention
through present contacts of the Company's officers and directors,
such as but not limited to attorneys, accountants, financial
advisors, bankers, businessmen and others who work with businesses
which may desire to go public. From time to time, such contacts
may refer their contacts, clients, acquaintances and others to the
Company. In analyzing prospective business opportunities,
management will consider such matters as the available
technical, financial, and managerial resources; working capital
and other financial requirements; history or operation, if any;
prospects for the future; nature of present and
expected competition; the quality and experience of management
services which may be available and the depth of that management;
the potential for further research, development, or
exploration; specific risk factors not now foreseeable but which
then may be anticipated to impact the proposed activities of the
Company; the potential for growth or expansion; the
potential for profit; the perceived public recognition or
acceptance of products, services, or trades; name identification;
and other relevant factors. Management of the Company will meet
personally with management and key personnel of the firm sponsoring
the business opportunity as part of its investigation. To the
extent possible, the Company intends to utilize written
reports and personal investigation to evaluate the above factors.
It may be anticipated that any opportunity in which the
Company participates will present certain risks. Many of these
risks cannot be adequately identified prior to selection of the
specific opportunity, and shareholders of the Company must,
therefore, depend on the ability of management to identify and
evaluate such risks. In the case of some of the opportunities
available to the Company, it may be anticipated that the promoters
thereof have been unable to develop a going concern or that such
business is in its development stage in that it has not
generated significant revenues from its principal business activity
prior to the Company's participation, and there is a risk, even
after the Company's participation in the activity and
the related expenditure of the Company's funds, that the combined
enterprises will still be unable to become a going concern or
advance beyond the development stage. Many of the
opportunities may involve new and untested products, processes, or
market strategies which may not succeed. Such risks will be
assumed by the Company and, therefore, its shareholders.
Acquisition of Opportunities
In implementing a structure for a particular business
acquisition, the Company may become a party to a merger,
consolidation, reorganization, joint venture, or licensing
agreement with another corporation or entity. It may also purchase
stock or assets of an existing business. It should be noted that
the Company likely has insufficient capital with which to make any
acquisitions. Accordingly, in any of the transactions alluded to
herein, it is likely that the consideration utilized to make any
acquisitions will consist of equity securities.
In the event that an acquisition is made utilizing primarily
equity securities (as is expected to be the case), the percentage
ownership of present shareholders will be diluted, the
extent of dilution depending upon the amount so issued. Persons
acquiring shares in connection with any acquisition of a business
may obtain an amount of equity securities sufficient to
control the Company. In addition, the Company's Directors may, as
part of the terms of the acquisition transaction, resign and be
replaced by new directors without a vote of the
Company's shareholders. Further, if the Company were to issue
substantial additional securities in any acquisition, such
issuance might have an adverse effect on the trading market in the
Company's securities in the future.
It is anticipated that any securities issued in any such
reorganization would be issued in reliance on exemptions from
registration under applicable federal and state securities laws.
In some circumstances, however, as a negotiated element of this
transaction, the Company may agree to register such securities
either at the time the transaction is consummated, under
certain conditions, or at specified times thereafter. The
issuance of substantial additional securities and their potential
sale into any trading market in the Company's securities may have
a depressive effect on such market.
The Company intends to structure a merger or acquisition in
such a manner as to minimize Federal and State tax consequences to
the Company and to any target company. Under Section 368
of the Internal Revenue Code of 1986, as amended (the "Code"), a
statutory merger or consolidation is an exempt transaction and may
be tax-free if effected in accordance with State
law. A tax-free reorganization may require the Company to
issue a substantial number of its securities in exchange for the
securities or assets of a target firm. Accordingly, the
proportional interests of the shareholders of the Company prior to
such transaction or reorganization may be substantially less than
the proportional interest of such shareholders in
the reorganized entity. Even if a merger or consolidation is
undertaken in accordance with the Code, there is no assurance that
Federal and State tax regulations will not change in the
foreseeable future and result in the Company incurring a
significant tax liability.
As part of the Company's investigation, management of the
Company intends to meet personally with management and key
personnel, may visit and inspect material facilities, obtain
independent analysis or verification of certain information
provided, check references of management and key personnel, and
take other reasonable investigative measures, to the extent of
the Company's limited financial resources and management expertise.
The manner in which the Company participates in an opportunity
will depend on the nature of the opportunity, the respective needs
and desires of the Company and other parties, the
management of the opportunity, and the relative negotiating
strength of the Company and such other management.
With respect to any mergers or acquisitions, negotiations
with target company management will be expected to focus on the
percentage of the Company which target company shareholders
would acquire in exchange for their shareholdings in the target
company. Depending upon, among other things, the target company's
assets and liabilities, the Company's shareholders will in
all likelihood hold a lesser percentage ownership interest in the
Company following any merger or acquisition. The percentage
ownership may be subject to significant reduction in the event
the Company acquires a target company with substantial assets. Any
merger or acquisition effected by the Company can be expected to
have a significant dilutive effect on the percentage
of shares held by the Company's shareholders.
The Company will participate in a business opportunity only
after the negotiation and execution of appropriate written
agreements. Although the terms of such agreements cannot be
predicted, generally such agreements will require specific
representations and warranties by all of the parties thereto, will
specify certain events of default, will detail the terms of
closing and the conditions which must be satisfied by each of the
parties prior to such closing, will outline the manner of bearing
costs if the transaction is not closed, will set forth
remedies on default, and will include miscellaneous other terms.
It is anticipated that the investigation of specific business
opportunities and the negotiation, drafting and execution of
relevant agreements, disclosure documents, and other
instruments will require substantial management time and attention
and substantial costs for accountants, attorneys, and others. If
a decision is made not to participate in a specific
business opportunity, the costs theretofore incurred in the
related investigation would not be recoverable. Furthermore, even
if an agreement is reached for the participation in a specific
business opportunity, the failure to consummate that transaction
may result in the loss to the Company of the related costs
incurred.
Further, companies subject to Section 13 or 15(d) of the
Exchange Act must furnish certain information about significant
acquisitions, including certified financial statements for the
company or companies acquired covering at least two years.
Consequently, if targeted acquisition prospects do not have, or are
unable to obtain, the requisite certified financial statements,
such acquisitions by the Company would appear to be inappropriate.
Competition
The Company is aware that there are many other public
companies with only nominal assets that are also searching for
operating businesses and other business opportunities as potential
acquisition or merger candidates. The Company will be in direct
competition with these other public companies in its search for
business opportunities. In addition, the Company expects to
encounter substantial competition in its efforts to attract
business opportunities from business development companies, venture
capital partnerships and corporations, venture capital affiliates
of large industrial and financial institutions, small business
investment companies and wealthy individuals. Competition in the
search for business opportunities is principally based upon
experience in connection with identifying and effecting business
acquisitions, financial and personnel resources and technical
expertise. Many of these entities have significantly greater
experience, financial and personnel resources, and managerial and
technical capabilities than the Company and in all likelihood will
be in a better position than the Company to obtain access to
attractive business opportunities. In view of the Company's
limited financial resources and personnel, the Company will
continue to be at a significant competitive disadvantage in
identifying possible business opportunities and successfully
completing a business combination.
In the event the Company acquires or merges with a business or
business opportunity in the telecommunications and/or internet
industries, the Company will face significant competition. The
telecommunications and internet industries are highly
competitive. It is anticipated that many of the Company's
potential competitors will have greater financial, technical,
operational, marketing and other resources and experience than the
Company. In addition, the telecommunications and internet
industries are typified by well established and better financed
companies with a long established and highly recognized market
presence.
The markets in the telecommunications and internet industries
can be significantly influenced by the marketing and pricing
decisions of larger industry participants and there are
limited barriers to entry in many of the telecommunications and
internet markets. The Company expects competition in these markets
to intensify in the future.
The telecommunications and internet industries are also
subject to rapid and significant changes in technology, including
frequent new service and product introductions, evolving
industry standards, and rapid obsolescence of equipment.
Competition from the effect of technological changes on the
Company's operations, in the event the Company acquires or merges
with a business or business opportunity in the telecommunications
or internet industries, cannot be predicted and could have a
material adverse effect on the Company's future business, financial
condition, and results of operations. Technological advancements,
telecommunications reform and the continuing commercialization of
the internet have all contributed to transforming the once
traditional telecommunications industry. Well established long
distance companies, regional Bell operating companies, internet
service providers and cable companies are continuing to build,
upgrade and enter many different markets in the telecommunications
and internet industries, which could materially impact the
Company's presence in any of the telecommunications and/or
internet industries. In addition, in the future the Company's most
significant competitors may be new entrants to the communications
and information services industry.
Research and Development
Prior to the Company becoming a "shell" corporation, the
Company did not spend any funds for research and development during
the last two fiscal years.
Regulation
Although the Company will be subject to regulation under the
Exchange Act, management believes the Company will not be subject
to regulation under the Investment Company Act of 1940,
insofar that the Company will not be engaged in the business of
investing or trading in securities. Such Act defines an
"investment company" as an issuer which is or holds itself out
as being engaged primarily in the business of investing,
reinvesting or trading of securities. Although management
believes that the Company will not be subject to regulation under
such Act insofar that the Company does not intend to engage in such
activities, the Company has obtained no formal determination as to
the status of the Company under such Act. The Company could be
expected to incur significant registration and compliance costs if
required to register under the Investment Company Act of 1940.
Accordingly, management will continue to review the
Company's activities from time to time with a view toward reducing
the likelihood the Company could be classified as an "investment
company".
In the event the Company acquires or merges with a business or
business opportunity in the telecommunications and/or internet
industries, the Company expects that its business will be
subject to various regulations. Generally, the telecommunications
industry is subject to the provisions of the Telecommunications Act
of 1996 and Federal Communication Commission ("FCC")
regulations thereunder, as well as applicable laws and regulations
of the various states administered by the relevant state
authorities. Certain aspects of the internet industry are
also subject to the Telecommunications Act of 1996 and regulations
of the FCC. There can be no assurance that the Company will be
able to comply with any such regulations. In addition,
regulations may be enacted in the future which may have a material
adverse effect on the business of the Company.
Year 2000 Issue
The year 2000 issue is the result of computer programs being
written using two digits, rather than four, to define the
applicable year. Software programs and hardware that have
date-sensitive software or embedded chips may recognize a date
using "00" as the year 1900 rather than the year 2000. This could
result in a major system failure or miscalculations causing
disruptions of operations, including a temporary inability to
engage in normal business activities. As a result, many companies
have been required to undertake major projects to
address the year 2000 issue.
Year 2000 issues are not currently material to the Company's
business, operations or financial condition in view of the
Company's current lack of business operations. However, year
2000 issues may become material to the Company in the event the
Company acquires or participates in another business opportunity.
Management intends to address this potential problem with any
prospective merger, acquisition candidate or other participant and
adopt a plan and a budget for addressing such issues, if necessary.
Employees
As of the date hereof, and other than the services provided by
its Chairman and Donalson Capital Corporation, the Company does not
have any full or part time employees and has no plans
for retaining employees until such time as the Company's business
warrants the expense, or until the Company successfully acquires or
merges with an operating business. The Company may find it
necessary to periodically hire part-time clerical help on an
as-needed basis.
Uncertainties and Risk Factors
In addition to other information and financial data set forth
elsewhere in this Registration Statement, the following risk
factors should be considered carefully in evaluating
the Company.
NO CURRENT BUSINESS OPERATIONS; NON-ARM'S LENGTH TRANSACTION.
In June 1999, the Company sold its then current business
operations to Total Technology, Inc., a company affiliated with
Robert Powell, Sr., a former officer and director of the Company,
in exchange for the return of 950,000 shares of Common Stock to the
Company, and the assumption of all liabilities of such
operations. As part of the agreement, the Company also agreed to
forgive all officer loans due from such individual (which amounted
to approximately $118,000). As a result, the Company has
no current business operations. While management believes the
agreement to sell the Massachusetts Operations contains terms which
generally are comparable to those which have been reached in
arm's-length negotiations with unaffiliated parties, the agreement
was reached while Mr. Powell was managing the Massachusetts
Operations and therefore is not the result of arm's length
negotiations between independent parties. Management believes,
however, that the transaction was completed on terms no less
favorable than would have been achieved with unaffiliated third
parties. With no current business operations, the Company can now
be defined as a "shell" corporation, whose principal business
purpose at this time is to locate and consummate a merger
or acquisition with a private entity. There is no assurance the
Company's intended merger or acquisition activities will be
successful or result in revenue or profit to the Company. The
likelihood of success of the Company must be considered in light of
the risks, expenses, difficulties and delays frequently encountered
in connection with the operation and development
of a new business. There is nothing at this time upon which to
base an assumption that any business or business opportunity the
Company acquires will prove successful, and there is no
assurance that it will be able to operate profitably.
EXTREMELY LIMITED CAPITALIZATION. The Company has
insufficient capital with which to make any significant asset
acquisitions. Accordingly, in any of the transactions alluded to
herein, it is likely that the consideration utilized to make any
acquisitions will consist of equity securities. In addition,
inasmuch as the Company's capitalization is limited and the
issuance of additional Common Stock will result in a dilution of
interest for present shareholders, it is unlikely the Company will
be capable of negotiating more than one merger or acquisition.
Consequently, the Company's lack of diversification may subject
the Company to economic fluctuation within a particular industry
in which a target company conducts business.
LACK OF PROFITABILITY; CONTINUING LOSSES; AND DOUBTFUL ABILITY
TO CONTINUE AS A GOING CONCERN. The Company has incurred net
losses from continuing operations of approximately
$283,000 and $764,000 in 1999 and 1998, respectively. As a result
of the Company's recurring losses from operations, the Company's
independent auditor's report, dated February 10, 2000, for
the year ended December 31, 1999, states that these conditions
raise substantial doubt about the Company's ability to continue as
a going concern. With the sale of the Massachusetts Operations
in June 1999, the Company's only operating division, the Company
has no current operations. Management expects that this transaction
will allow the Company to focus on other business opportunities in
its attempt to locate and consummate a merger or acquisition with a
private entity. There can be no assurance, however, that the
Company will be able to acquire any business or business
opportunity or that any business or business opportunity the
Company acquires will prove successful or will be able to operate
profitably.
COMPETITION FOR BUSINESS OPPORTUNITIES. The Company is aware
that there are many other public companies with only nominal assets
that are also searching for operating businesses and
other business opportunities as potential acquisition or merger
candidates. The Company will be in direct competition with these
other public companies in its search for business opportunities.
In addition, the Company expects to encounter substantial
competition in its efforts to attract business opportunities from
business development companies, venture capital partnerships and
corporations, venture capital affiliates of large industrial and
financial institutions, small business investment companies and
wealthy individuals. Competition in the search for business
opportunities is principally based upon experience in connection
with identifying and effecting business acquisitions, financial and
personnel resources and technical expertise. Many of these
entities have significantly greater experience, financial and
personnel resources, and managerial and technical capabilities than
the Company and in all likelihood will be in a better position
than the Company to obtain access to attractive business
opportunities. In view of the Company's limited financial
resources and personnel, the Company will continue to be at a
significant competitive disadvantage in identifying possible
business opportunities and successfully completing a business
combination.
LACK OF MARKET RESEARCH OR IDENTIFICATION OF ACQUISITION OR
MERGER CANDIDATE. The Company has neither conducted nor have
others made available to it results of market research concerning
the availability of potential business opportunities. Therefore,
management has no assurance that market demand exists for a merger
or acquisition as contemplated by the Company. Although
the Company has determined to initially limit its search for a
potential business or business opportunity to firms involved or
intending to be involved in the telecommunications and/or
internet industries, there is no assurance the Company will be able
to acquire a business opportunity on terms favorable to the
Company.
CONFLICTS OF INTEREST - POSSIBLE NEGOTIATION OR OTHERWISE
GRANT OF CONSENT BY MANAGEMENT TO PURCHASE OF MANAGEMENT'S COMMON
STOCK. As a condition to or in connection with a proposed
merger or acquisition transaction, management may actively
negotiate or otherwise consent to the purchase of all or a portion
of its shares of Common Stock. In connection with any such stock
purchase transaction, it is possible that a premium may be paid for
management's shares of Common Stock and that the other shareholders
in the Company may not receive any portion thereof in the
event such premium may be paid. Any transaction structured in such
manner may present management with conflicts of interest and as a
result of such conflicts, may possibly compromise management's
fiduciary duties to the Company's shareholders, as the potential
would therefore exist for management to consider its own personal
pecuniary benefit rather than the best interests of the Company's
other shareholders. In this regard, management and control
shareholders, if any, generally have a fiduciary obligation under
Delaware law to not effect transactions which are not in good faith
furtherance of rational corporate purposes or are unfair
to unaffiliated stockholders. Further, the Company's other
shareholders may not be afforded an opportunity to otherwise
participate in any particular stock buy-out transaction.
Additionally, in any such transaction, it is possible, although not
presently intended, that the Company may borrow funds to be used
directly or indirectly to purchase management's shares.
POSSIBLE CHANGE IN CONTROL AND MANAGEMENT. The successful
completion of a merger or acquisition may result in a change of
control of the Company. Any such change in control may
also result in the resignation or removal of the Company's present
management.
REGULATION. Although the Company will be subject to
regulation under the Exchange Act, management believes the Company
will not be subject to regulation under the Investment Company
Act of 1940, insofar that the Company will not be engaged in the
business of investing or trading in securities. Such Act defines
an "investment company" as an issuer which is or holds itself
out as being engaged primarily in the business of investing,
reinvesting or trading of securities. Although management
believes that the Company will not be subject to regulation
under such Act insofar that the Company does not intend to engage
in such activities, the Company has obtained no formal
determination as to the status of the Company under such Act. The
Company could be expected to incur significant registration and
compliance costs if required to register under the Investment
Company Act of 1940. Accordingly, management will continue to
review the Company's activities from time to time with a view
toward reducing the likelihood the Company could be classified as an
"investment company".
TAXATION. In the course of any acquisition or merger the
Company may undertake, a substantial amount of attention will be focused
upon federal and state tax consequences to both the Company and the "target"
company. Presently, under Section 368 of the Internal Revenue Code
of 1986, as amended, a statutory merger or consolidation is an
exempt transaction and may be tax-free if effected in accordance
with State law. While the Company expects to undertake any merger
or acquisition so as to minimize federal and state tax consequences
to both the Company and the "target" company, there is no assurance
that such business combination will meet the statutory requirements
of a reorganization or that the parties will obtain the intended
tax-free treatment upon a transfer of stock or assets. A
nonqualifying reorganization could result in the
imposition of both federal and state taxes which may have
substantial adverse effect on the Company.
LIMITATION ON LIABILITY OF DIRECTORS. The Company's
Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its
shareholders for monetary damages resulting from breaches of his
fiduciary duty of care as a director, including breaches which
constitute gross negligence. As a result, the rights of the
Company and its shareholders to obtain monetary damages for acts
or omissions of directors will be more limited than they would be
in the absence of such provision. The provision would not
apply to a violation of a director's responsibility under the
Federal securities laws.
POSSIBLE USE OF DEBT FINANCING; DEBT OF AN ACQUIRED BUSINESS.
There are currently no limitations relating to the Company's
ability to borrow funds to increase the amount of capital
available to the Company to effect a business combination or
otherwise finance the operations of an acquired business. The
amount and nature of any borrowings by the Company will depend on
numerous considerations, including the Company's capital
requirements, the Company's perceived ability to meet debt service
on such borrowings, and then-prevailing conditions in the financial
markets, as well as general economic conditions. There can be no
assurance that debt financing, if required or otherwise sought,
will be available on terms deemed to be commercially acceptable
and in the best interest of the Company. The inability of the
Company to borrow funds required to effect or facilitate a business
combination, or to provide funds for an additional infusion of
capital into an acquired business, may have a material adverse
effect on the Company's financial condition and future prospects.
Additionally, to the extent that debt financing ultimately
proves to be available, any borrowings may subject the Company to
various risks traditionally associated with incurring of
indebtedness, including the risks of interest rate fluctuations
and insufficiency of cash flow to pay principal and interest.
Furthermore, an acquired business may already have
previously-incurred debt financing and, therefore, the risks
inherent thereto, as discussed above.
COMPETITION IN THE TELECOMMUNICATIONS AND INTERNET INDUSTRIES.
In the event the Company acquires or merges with a business or
business opportunity in the telecommunications and/or
internet industries, the Company will face significant competition.
The telecommunications and internet industries are highly
competitive. It is anticipated that many of the Company's
potential competitors will have greater financial, technical,
operational, marketing and other resources and experience than the
Company. In addition, the telecommunications and internet
industries are typified by well established and better financed
companies with a long established and highly recognized market
presence.
GOVERNMENT REGULATIONS IN THE TELECOMMUNICATIONS AND INTERNET
INDUSTRIES. In the event the Company acquires or merges with a
business or business opportunity in the telecommunications
and/or internet industries, the Company expects that its business
will be subject to various regulations. Generally, the
telecommunications industry is subject to the provisions of the
Telecommunications Act of 1996 and Federal Communication Commission
("FCC") regulations thereunder, as well as applicable laws and
regulations of the various states administered by the
relevant state authorities. Certain aspects of the internet
industry are also subject to the Telecommunications Act of 1996 and
regulations of the FCC. There can be no assurance that the
Company will be able to comply with any such regulations. In
addition, regulations may be enacted in the future which may have a
material adverse effect on the business of the Company.
CUMULATIVE VOTING AND PRE-EMPTIVE RIGHTS. There are no
pre-emptive rights in connection with the Company's Common Stock.
Therefore, current shareholders of the Company will be in all
likelihood significantly diluted in their percentage ownership of
the Company in the event the Company issues shares of stock in
connection with an acquisition of a buisness or business
opportunity. Cumulative voting in the election of directors is not
allowed. Accordingly, the holders of a majority of the shares of
Common Stock, present in person or by proxy, will be
able to elect all of the Company's Board of Directors.
DIVIDENDS. At the present time the Company does not
anticipate paying dividends on its Common Stock in the foreseeable
future. Any future dividends will depend on earnings, if any, of
the Company, its financial requirements and other factors.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144. Certain shares
of Common Stock presently held by management and others are
"restricted securities" as that term is defined in Rule 144,
promulgated under the Securities Act. Under Rule 144, a person (or
persons whose shares are aggregated) who has satisfied a one-year
holding period, may, under certain circumstances sell
within any three-month period a number of shares which does not
exceed the greater of 1% of the then outstanding shares of Common
Stock, or the average weekly trading volume during the four
calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of shares without any quantity
limitation by a person who is not an affiliate of the Company and
who has satisfied a two-year holding period. Such holding periods
have already been satisfied in many instances. Therefore, actual
sales or the prospect of sales of such shares under Rule 144
in the future may depress the prices of the Company's securities.
ISSUANCE OF SHARES IN MERGER OR ACQUISITION. Any acquisition
effected by the Company may result in the issuance of additional
Common Stock or Preferred Stock without shareholder
approval and may result in substantial dilution in the percentage
of the Company's securities held by the Company's
then-shareholders. Moreover, the Common Stock or Preferred Stock
issued in any such merger or acquisition transaction may be valued
on an arbitrary or non arm's-length basis by management of the
Company, resulting in an additional reduction in the percentage of
securities held by the Company's then-shareholders.
PENNY STOCK RULES. The Company's Common Stock is covered by a
Securities and Exchange Commission rule that imposes additional
sales practice requirements on broker/dealers who sell
such securities to persons other than established customers and
accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouses). For transactions covered by the rule, the
broker/dealer must make a special suitability determination
for the purchaser and have received the purchaser's written
agreement to the transaction prior to the sale. Consequently, the
rule may affect the ability of shareholders in this offering to
sell their shares in the secondary market. In addition, Securities
and Exchange Commission rules impose additional sales practice
requirements on broker/dealers who sell penny securities. These
rules require a summary of certain essential items. The items
include the risk of investing in penny stocks in both public
offerings and secondary marketing; terms important to an
understanding of the function of the penny stock market, such as
"bid" and "offer" quotes, a dealers "spread" and broker/dealer
compensation; the broker/dealer compensation, the
broker/dealers duties to its customers, including the disclosures
required by any other penny stock disclosure rules; the customers
rights and remedies in cases of fraud in penny stock
transactions; and, the NASD's toll free telephone number and the
central number of the North American Securities Administrators
Association, for information on the disciplinary history of
broker/dealers and their associated persons. The additional
burdens imposed upon broker/dealers by such requirements may
discourage broker/dealers from effecting transactions in the Common
Stock, which could severely limit the market of the Company's
Common Stock.
RESTRICTIONS ON TRANSFERABILITY; LIMITED TRADING MARKET. Only
a limited trading market for the Common Stock currently exists.
The market price of the Common Stock, which currently is
listed on the OTC Bulletin Board under the symbol TTXI, has, in the
past, fluctuated substantially over time and may in the future be
highly volatile. In addition, the Company believes that relatively
few market makers make a market in the Company's Common Stock. The
actions of any of these market makers could substantially impact
the volatility of the Company's Common Stock.
SECURITIES AND EXCHANGE COMMISSION AND MARYLAND INVESTIGATION.
In May 1997, the Company was notified by the Securities and
Exchange Commission of a formal order of a private, non-public
investigation of certain issues related to the Company's stock
trading. In August 1997, the Company supplied copies of various
books and records, and the Commission deposed several of the
Company's officers. No further notification has been received
since then from the Commission. In addition, in June 1998, the
Company received notification from the Maryland Division of
Securities (the "Maryland Division") that the Company may have
offered and sold common stock in violation of Maryland regulations
based upon an advertisement. The Company cooperated with the
requests by the Maryland Division and furnished appropriate
information and informed the Maryland Division that the Company did
not authorize its name to be used in the advertisement. In
addition, in October 1998, the Company received notification from
the Maryland Division that the Company may have potentially
violated regulations on which the Company relied for a 1997 private
placement. The Company denied such violation and advised the
Maryland Division that it did file an appropriate notice with the
State of Maryland. In December 1998, the Company supplied
information and other documents requested by the Maryland Division.
No further notification has been received since then from the
Maryland Division. While there can be no assurance, in the
event any further action is taken by either the Commission or the
Maryland Division, management does not expect such will result in
an unfavorable outcome to the Company or have a material
adverse effect.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with
the Financial Statements and Notes thereto (the "Financial
Statements") and is qualified in its entirety by the foregoing and
by other more detailed financial information appearing elsewhere in
this Registration Statement.
Overview
Telco-Technology, Inc. (the "Company") was organized under
the laws of the State of Nevada on November 23, 1993 under the name
Haycock Morrison Inc. ("Haycock"). In 1994, Haycock
completed the sale of certain shares of its Common Stock pursuant
to an exemption provided by Rule 504 of Regulation D promulgated
under the Securities Act of 1933, as amended (the
"Securities Act"). On January 27, 1995, Haycock entered into an
acquisition agreement with Telco Technology, Inc., a Delaware
corporation ("Telco"). Pursuant to the terms of the acquisition,
Haycock issued 5,000 shares of its Common Stock which represented
60% of the then outstanding Common Stock of Haycock.
After giving effect to the above transaction, the Company
ceased all activities as Haycock and changed its name to
Telco-Technology, Inc. The Company continued the business
operations then conducted by Telco of providing long distance
telephone services and computer networks for voice and data
transmissions which operations were primarily conducted in the
State of Massachusetts (the "Massachusetts Operations"). In 1998,
the Company was reorganized as a Delaware corporation. The Company
continued such operations until June 1999.
In June 1999, the Company sold the Massachusetts Operations to
a company affiliated with a former officer and director of the
Company in exchange for the return of 950,000 shares of Common
Stock to the Company, and the assumption of all liabilities of the
Massachusetts Operations. As part of the agreement, the Company
also agreed to forgive all officer loans due from such
individual (which amounted to approximately $118,000). As a
result of the foregoing, the Company has no current business
operations. As such, the Company can now be defined as a
"shell" corporation, whose principal business purpose at this time
is to locate and consummate a merger or acquisition with a private
entity.
The disposal of the Massachusetts Operations has been
accounted for as a discontinued operation and, accordingly, its
net assets (liabilities) have been segregated from continuing
operations in the balance sheet included in the Financial
Statements, and its operating results are segregated and reported
as discontinued operations in the statements of operations and cash
flows included in the Financial Statements.
Plan of Operation
In 1999, management decided that it would be in the best
interests of the Company and its stockholders to seek additional
business opportunities and sell the Massachusetts Operations, its
then sole business operations. As a result of the sale of the
Massachusetts Operations which occurred in June 1999, the Company
has no current business operations.
Management plans to investigate, research and, if justified,
potentially acquire or merge with one or more businesses or
business opportunities. The Company currently has no commitment or
arrangement, written or oral, to participate in any business
opportunity and management cannot predict the nature of any
potential business opportunity it may ultimately consider.
Management will have broad discretion in its search for and
negotiations with any potential business or business opportunity.
The Company has determined to initially limit its search for a
potential business or business opportunity to firms involved or
intending to be involved in the telecommunications and/or internet
industries. In this regard, the Company will not restrict its
search to any specific geographical location, and the Company may
participate in a business venture of virtually any kind or nature.
In addition, the Company may determine at a future date to seek a
potential business or business opportunity in another industry in
the event the Company does not consummate a transaction with a
business or business opportunity in the telecommunications and/or
internet industries. See, also, Part I, Item 1 for a more detailed
discussion of the Company's plan of operation.
Liquidity and Capital Resources
On December 31, 1999, the Company had working capital of
approximately $1,000, an equity to debt ratio of approximately 8.4
to 1, and stockholders' equity of approximately $219,000. At
December 31, 1999, the Company had approximately $27,000 in cash,
otal assets of approximately $245,000 and total liabilities of
approximately $26,000. On December 31, 1998, the Company had
working capital of approximately $304,000, an equity to debt ratio
of approximately 41.6 to 1, and stockholders' equity of
approximately $748,000. At December 31, 1998, the Company had
approximately $227,000 in cash, total assets of approximately
$766,000 and total liabilities of approximately $18,000.
As a result of the sale of the Massachusetts Operations, the
Company has no current business operations. As such, the Company
can now be defined as a "shell" corporation, whose principal
business purpose at this time is to locate and consummate a merger
or acquisition with a private entity. Management expects that the
sale of the Massachusetts Operations will allow the Company to
focus on other business opportunities in its attempt to locate and
consummate such a merger or acquisition. In view of the Company's
current limited cash position, the Company intends to complete such
a transaction in the next twelve months. It should be noted that
the Company likely has insufficient capital with which to make any
acquisitions. Accordingly, in any of the transactions to merge
with or acquire a private entity, it is likely that the
consideration utilized to make any acquisitions will consist of
equity securities. However, in order to meet certain working
capital needs and operating expenses in the next twelve months in
the Company's attempt to locate and effect a business combination,
and insofar that no cash was received in connection with sale of
the Massachusetts Operations, it may be necessary for the
Company to attempt to raise additional funds. As of the date
hereof, the Company has not made any arrangements to raise any
capital. In the event the Company does attempt to raise capital
most likely the only method available to the Company would be a
private sale of its securities. Because of the current status of
the Company as a "shell" corporation, it is unlikely that it
would be able to obtain additional funding from either a bank or
other commercial lender. There can be no assurance that the
Company will be able to obtain additional funding when needed, or
that such funding, if available, can be obtained on terms
acceptable to the Company. In addition, there can be no assurance
that the Company will be able to acquire any business or
business opportunity within such period of time or at any time at
all, or that any business or business opportunity the Company
acquires will prove successful or will be able to operate
profitably.
Item 3. Description of Property.
The Company currently maintains its offices in the home of its
Chairman located at 60 Bowers Lane, Closter, New Jersey 07624
pursuant to an oral agreement on a rent-free, month-to-month basis.
It is contemplated that at such future time as an acquisition or
merger transaction may be completed, the Company will secure
commercial office space from which it will conduct its
business. Until such an acquisition or merger, the Company lacks
any basis for determining the kinds of office space or other
facilities necessary for its future business. The Company has no
current plans to secure such commercial office space. It is also
possible that a merger or acquisition candidate would have adequate
existing facilities upon completion of such a transaction, and the
Company's principal offices may be transferred to such existing
facilities.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of the date hereof, (i) the
number of shares of Common Stock owned of record or beneficially,
or both, by each person who owned of record, or is known
by the Company to have beneficially owned, individually, or with
his associates, more than 5% of such shares then outstanding; (ii)
the number of shares owned beneficially by each Director of
the Company and each executive officer of the Company; and (iii)
the number of shares owned beneficially by all Directors and
executive officers as a group. Except as otherwise indicated
below, each of the persons listed below has sole voting and
investment power with respect to his or her shares.
Amount and Nature
Name of Of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
Common Stock Donald R. McKelvey 5,052,125(1) 57.0%
Common Stock Joseph Jaoudi 520,000 5.9%
Common Stock Ina McWey 45,000(2) 6.1%
Common Stock Thomas N. Fischetti 62,000(3) 0.7%
Common Stock Robert W. McKelvey - (4) -
Common Stock All Executive
Officers and
Directors
as a Group 5,114,125 57.7%
(1) Includes 5,012,500 shares held by Donald R. McKelvey and
39,625 shares held by Donalson Capital Corporation ("Donalson").
Mr. McKelvey is the sole shareholder of Donalson and,
by virtue of such ownership, Mr. McKelvey may be deemed the
beneficial owner of the shares held by Donalson. The address for
Mr. McKelvey is 60 Bowers Lane, Closter, New Jersey.
(2) Includes 45,000 shares held by Ina McWey and 500,000 shares
which, according to the records of the Company's transfer agent,
are still held of record by Robert Powell, Sr. In the Acquisition
and Stock Transfer Agreement entered into in June 1999 by and among
the Company, Mr. Powell and Total Technology, Inc. ("Total
Technology") (pursuant to which the Massachusetts Operations were
transferred to Total Technology), Mr. Powell represented
and warranted that in or about April 1999 he transferred such
500,000 shares to Ina McWey, and that he has no direct or indirect
beneficial ownership in such shares or any other rights with
respect thereto. Mr. Powell agreed that in the event he acquired
beneficial ownership of such shares at any time, he would
immediately return such shares or cause such shares to be returned
to the Company without any additional consideration.
(3) Includes 52,000 held by Mr. Fischetti and 10,000 shares held
by Allmike Metal Technology, Inc. ("Allmike"). Mr. Fischetti is
the majority shareholder and President of Allmike and, by virtue
thereof, Mr. Fischetti may be deemed the beneficial owner of the
shares held by Allmike. The address for Mr. Fischetti is 65
Anderson Avenue, Moonachie, New Jersey.
(4) The address for Mr. McKelvey is 126 Barley Road, Ivyland,
Pennsylvania.
Item 5. Directors and Executive Officers, Promoters and Control Persons.
Set forth below are the present directors and executive
officers of the Company. Note that there are no other persons who
have been nominated or chosen to become directors nor are
there any other persons who have been chosen to become executive
officers. Directors are elected to serve until the next annual
meeting of shareholders and until their successors have been
elected and have qualified. Officers are appointed to serve until
the meeting of the Board of Directors following the next annual
meeting of shareholders and until their successors have been
elected and qualified. None of the directors and officers is
related to any other director or officer of the Company except as
otherwise set forth below.
PRESENT POSITION HAS SERVED AS
NAME AGE AND OFFICES DIRECTOR SINCE
Donald R. McKelvey 54 Chairman of the Board, 1995
President, Treasurer
and Director
Robert W. McKelvey 42 Secretary and Director 1999
Thomas N. Fischetti 46 Director 1999
Set forth below are brief accounts of the business experience
during the past five years of each director and executive officer
of the Company and each significant employee of the Company.
DONALD R. McKELVEY has been a Director, Chairman of the Board
and Treasurer of the Company for more than the past five years
since January 1995 and also became its President in March 1999.
Mr. McKelvey is also the sole officer, director and stockholder of
Donalson Capital Corp., a company formed by Mr. McKelvey in 1983,
which provides certain consulting services to the Company. Donald
R. McKelvey is the brother of Robert W. McKelvey.
ROBERT W. McKELVEY has been a Director and Secretary of the
Company since March 1999. Since December 1994, he has been a
Regional Manager of Legaledge Software which provides computer
software products to primarily corporate law departments, law firms
and government agencies. From February 1987 to December 1994, he
was employed by Positek, Inc., a Philadelphia based software
publisher, initially in the position of a Regional Manager and then
as Mid-Atlantic District Manager. Robert W. McKelvey is the
brother of Donald R. McKelvey.
THOMAS N. FISCHETTI has been a Director of the Company since
March 1999. Mr. Fischetti is the President and majority
shareholder of Allmike Metal Technology, Inc., a New Jersey based
developer, designer and manufacturer of products targeted for the
wireless and fibre optic telecommunications markets. He has been
involved with such company for more than the past five years.
Item 6. Executive Compensation.
The following summary compensation table sets forth
information concerning the annual and long-term compensation for
services in all capacities to the Company for the years ended
December 31, 1999, 1998 and 1997, of those persons who were, at
December 31, 1999 (i) the chief executive officer and (ii) the
other most highly compensated executive officers of the Company,
whose annual base salary and bonus compensation was in excess of
$100,000 (the named executive officers):
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
NAME AND PRINCIPAL FISCAL
POSITION YEAR SALARY BONUS
Donald R. McKelvey(2) 1999 $0 $0
Chairman of the Board 1998 $0 $0
1997 $0 $0
Robert Powell, Sr.(5) 1999 $ 3,900 $0
President 1998 $35,000 $0
1997 $40,500 $0
LONG-TERM
COMPENSATION
RESTRICTED
NAME AND PRINCIPAL FISCAL STOCK ALL OTHER
POSITION YEAR VALUE(1) COMPENSATION
Donald R. McKelvey(2) 1999 $0 $ 95,812(3)
Chairman of the Board 1998 $490,000 $120,817(3)
1997 $625,000 $ 45,241(3)
Robert Powell, Sr.(4) 1999 $0 $ 5,944(4)
President 1998 $0 $13,677(4)
1997 $625,000 $14,494(4)
_____________________
(1) In 1999, the Company issued 3,000,000 shares of Common Stock
to Mr. McKelvey for additional compensation for 1998. The expense
was accrued for 1998. In addition, in December 1998, the
Company issued 500,000 shares of Common Stock to Mr. McKelvey for
additional compensation for 1998. In March 1997, the Company
issued 500,000 shares to each of Mr. McKelvey and Mr. Powell
for additional compensation for 1997. Dollar values of awards are
based on the average of the bid and asked prices of the Company's
Common Stock on the dates of grant. All of such shares
issued to Mr. Powell as reflected herein or previously issued have
either been returned to the Company with the exception of 500,000
shares which were transferred to Ina McWey. (See, however,
Part I, Item 4).
(2) Since March 1999, Mr. McKelvey has also been President of the
Company.
(3) Consists of cash payments made in 1997, 1998 and 1999 to
Donalson Capital Corporation ("Donalson") for consulting fees of
$25,000, $100,000 and $80,000, respectively, and 7.50% per
annum imputed interest on the officers interest-free loans. (See
Part I, Item 7). Mr. McKelvey is the sole officer, director and
stockholder of Donalson.
(4) Consists of 7.50% per annum imputed interest on the officers
interest-free loans. (See Part I, Item 7).
(5) Mr. Powell, who is no longer employed by the Company, served as
President of the Company until March 1999 and managed the Company's
Massachusetts Operations until it was transferred to a
company controlled by Mr. Powell in June 1999.
Compensation of Directors
Since inception, no director has received any cash
compensation for his services as such. In the past, directors have
been and will continue to be reimbursed for reasonable expenses
incurred on behalf of the Company.
Item 7. Certain Relationships and Related Transactions.
During 1998, the Company issued 500,000 shares of Common Stock
to Donald R. McKelvey for additional compensation and agreed to
issue an additional 3,000,000 shares of Common Stock to him
for additional compensation in 1999. Such additional 3,000,000
shares were issued in January 1999.
In March 1995, the Company entered into a three year
consulting agreement with Donalson Capital Corporation
("Donalson"), a company owned by Donald R. McKelvey. Such
agreement provided for a fee of $120,000 per year and was paid for
in full by the Company issuing 120,000 shares of Common Stock in
1996. Such agreement was extended from March 1998 to December 1998
at a rate of $10,000 per month. In January 1999, the Company
entered into a new three year consulting agreement with Donalson
providing for a monthly fee of $10,000 during the term. At December
31, 1999, a balance of $8,042 was owed to Donalson under the
agreement.
In June 1999, and pursuant to an Acquisition and Stock
Transfer Agreement among the Company, Robert Powell, Sr. and Total
Technology, Inc., a company affiliated with Mr. Powell
("Total Technology"), the Company sold and transferred all of the
Massachusetts Operations to Total Technology. Pursuant to the
agreement, Mr. Powell returned 950,000 shares of the Company's
Common Stock to the Company and Total Technology assumed all
liabilities of the Massachusetts Operations. As part of the
agreement, the Company also agreed to forgive all officer loans due
from Mr. Powell (which amounted to approximately $118,000).
At December 31, 1999 and 1998, there were officer loans
outstanding to the Company in the amounts of $218,006 and $412,972,
respectively. In June 1999, such officer loans due from Mr.
Powell (approximately $118,000) were forgiven as part of the
consideration in connection with the sale and transfer of the
Massachusetts Operations. The balance of the loans are due from
Mr. McKelvey. Such loans are unsecured, non-interest bearing with
no specific terms of repayment.
Item 8. Description of Securities.
General
The Company is authorized to issue 13,000,000 shares of Common
Stock, par value $.001, and 2,000,000 shares of preferred stock,
par value $.001. There are currently outstanding 8,869,944
shares of Common Stock and no preferred stock.
Common Stock
The holders of Common Stock have one vote per share for the
election of Directors, without provision for cumulative voting, and
on all other matters. Thus, holders of more than 50% of
the shares voting for the election of Directors can elect all the
Directors, if they choose to do so. The Common Stock is not
redeemable and has no conversion or preemptive rights. In the
event of liquidation of the Company, the holders of Common Stock
will share equally in any balance of the corporate assets available
for distribution to them after satisfaction of creditors and the
holders of the Company's senior securities such as holders of
Preferred Stock, and debenture holders, if any.
Preferred Stock
The Preferred Stock may be divided into Series or Classes,
with special voting rights and preferences, to be established by
the management of the Company upon the approval of a majority
vote of the Directors of the Company. If the Board of Directors
authorized the issuance of shares of Preferred Stock with
conversion rights, the number of shares of Common Stock
outstanding could potentially be increased by up to the authorized
amount. Issuance of Preferred Stock could, under certain
circumstances, have the effect of delaying or preventing a change
in control of the Company and may adversely affect the rights of
holders of other classes of Preferred Stock or holders of Common
Stock. Also, Preferred Stock could have preferences over the
Common Stock and other series of Preferred Stock with respect to
dividends and liquidation rights.
Dividends
The payment by the Company of cash dividends, if any, in the
future, rests within the discretion of its Board of Directors and,
among other things, will depend upon the Company's earnings, its
capital requirements and its financial condition, as well as other
relevant factors. The Company has not declared any cash dividends
since inception, and has no present intention of paying any cash
dividends in the foreseeable future, it being the intention of
management to use earnings, if any, to generate increased growth.
Transfer Agent
The Transfer Agent of the Company's Common Stock is Olde
Monmouth Stock Transfer Co., Inc., 77 Memorial Parkway, Suite 101,
Atlantic Highlands, New Jersey 07716.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters.
The Company's Common Stock is presently being traded in the
over-the-counter market under the symbol "TTXI" and is listed on
the OTC Bulletin Board. The following chart sets forth the
range of the high and low bid quotations for the Company's Common
Stock for each period indicated. The quotations represent prices
between dealers and do not include retail markups,
markdowns, commissions or other adjustments and may not represent
actual transactions.
BID PRICES
PERIOD HIGH LOW
Year ended December 31, 1997:
Jan. 1, 1997 to March 31, 1997 $1.31 $0.50
April l, 1997 to June 30, 1997 $1.31 $0.37
July 1, 1997 to Sept. 30, 1997 $0.44 $0.30
Oct. 1, 1997 to Dec. 31, 1997 $0.69 $0.25
Year ended December 31, 1998:
Jan. 1, 1998 to March 31, 1998 $0.44 $0.19
April l, 1998 to June 30, 1998 $0.50 $0.19
July 1, 1998 to Sept. 30, 1998 $0.44 $0.20
Oct. 1, 1998 to Dec. 31, 1998 $0.21 $0.12
Year ended December 31, 1999:
Jan. 1, 1999 to March 31, 1999 $0.19 $0.12
April l, 1999 to June 30, 1999 $0.19 $0.10
July 1, 1999 to Sept. 30, 1999 $0.19 $0.08
Oct. 1, 1999 to Dec. 31, 1999 $0.13 $0.08
As of December 31, 1999 there were approximately 225 record
holders of the Company's Common Stock.
The Company has never declared any cash dividends on its
Common Stock and does not anticipate declaring cash dividends in
the foreseeable future.
Penny Stock Rules
The Company's Common Stock is covered by a Securities and
Exchange Commission rule that imposes additional sales practice
requirements on broker/dealers who sell such securities to
persons other than established customers and accredited investors
(generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouses).
For transactions covered by the rule, the broker/dealer must make a
special suitability determination for the purchaser and
have received the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability
of shareholders in this offering to sell their shares in the
secondary market. In addition, Securities and Exchange Commission
rules impose additional sales practice requirements on
broker/dealers who sell penny securities. These rules
require a summary of certain essential items. The items include
the risk of investing in penny stocks in both public offerings and
secondary marketing; terms important to an understanding of
the function of the penny stock market, such as "bid" and "offer"
quotes, a dealers "spread" and broker/dealer compensation; the
broker/dealer compensation, the broker/dealers duties to its
customers, including the disclosures required by any other penny
stock disclosure rules; the customers rights and remedies in cases
of fraud in penny stock transactions; and, the NASD's toll
free telephone number and the central number of the North American
Securities Administrators Association, for information on the
disciplinary history of broker/dealers and their associated
persons. The additional burdens imposed upon broker/dealers by
such requirements may discourage broker/dealers from effecting
transactions in the Common Stock, which could severely limit the
market of the Company's Common Stock.
Item 2. Legal Proceedings.
There are no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
Item 3. Changes in and Disagreements with Accountants.
The Company has not, during its two most recent fiscal years,
changed or has had any disagreement with is principal independent
accountant. The independent accountant did not rely on any other
accountant's work or report.
Item 4. Recent Sales of Unregistered Securities.
The following sets forth information relating to all
securities of the Company sold during the past three years without
registration under the Securities Act:
From January 1997 to July 1997, the Company sold 1,056,863
shares of Common Stock to subscribers for the aggregate
consideration of $753,295 in reliance upon the exemption from
registration contained in Regulation D promulgated under the
Securities Act. No underwriters were used and no underwriting
commissions were paid.
In January, March and October 1997, the Company issued an
aggregate of 240,500 shares of Common Stock to three unaffiliated
consultants for consulting services, 140,500 shares of which
were issued in reliance upon the exemption from registration
contained in Regulation D promulgated under the Securities Act and
100,000 shares of which were issued in reliance upon the
exemption from registration pursuant to Section 4(2) of the
Securities Act.
In March 1997, the Company issued 500,000 shares of Common
Stock to each of Donald R. McKelvey and Robert Powell, Sr. for
compensation in reliance upon the exemption from registration
pursuant to Section 4(2) of the Securities Act.
In May 1997, the Company sold 625,000 shares of Common Stock
to Joseph Jaoudi, a non-U.S. person, for $250,000 in reliance upon
the exemption from registration contained in Regulation S
promulgated under the Securities Act. No underwriters were used
and no underwriting commissions were paid.
In April 1998, the Company sold 50,000 shares of Common Stock
to Wall Street Communications, Inc. for $8,450 and in April and May
1998, the Company issued an additional 250,000 shares of Common
Stock to Wall Street Communications, Inc. for consulting services
in reliance upon the exemption from registration contained in
Regulation D promulgated under the Securities Act. No
underwriters were used and no underwriting commissions were paid.
In December 1998, the Company issued 500,000 shares of Common
Stock to Donald R. McKelvey for compensation in reliance upon the
exemption from registration pursuant to Section 4(2) of the
Securities Act.
In January and February 1999, the Company issued an aggregate
of 3,000,000 shares of Common Stock to Donald R. McKelvey for
compensation in reliance upon the exemption from
registration pursuant to Section 4(2) of the Securities Act.
In January 1999, the Company issued 12,000 shares of Common
Stock to James Martin for consulting services in reliance upon the
exemption from registration pursuant to Section 4(2) of
the Securities Act.
In September 1999, the Company issued 20,000 shares of Common
Stock to Clarence Smith for professional services in reliance upon
the exemption from registration pursuant to Section 4(2)
of the Securities Act.
In December 1999, the Company issued 25,000 shares of Common
Stock to David M. Kaye, Esq. for professional services in reliance
upon the exemption from registration pursuant to Section
4(2) of the Securities Act.
With respect to the issuances pursuant to Regulation D, the
Company, as a non-reporting entity, relied upon the exemption which
permits the sale of up to $1 million in securities during
a 12 month period under Rule 504 of Regulation D, and with respect
to the Section 4(2) transactions as indicated above, the Company
relied upon the exemption provided therein for "transactions by the
issuer not involving any public offering". With respect to the
issuance pursuant to Regulation S, the Company relied upon the
exemption provided therein for issuances made outside the United
States to persons other than "U.S. Persons".
Item 5. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law contains
various provisions entitling directors, officers, employees or
agents of the Company to indemnification from judgments,
fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, as the result of an action or
proceeding (whether civil, criminal, administrative or
investigative) in which they may be involved by reason of being or
having been a director, officer, employee or agent of the Company
provided said persons acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests
of the Company (and, with respect to any criminal action or
proceedings, had no reasonable cause to believe that the conduct
complained of was unlawful). Also, the Certificate of
Incorporation of the Company states that the indemnification
provisions of Section 145 of the Delaware Corporation Law shall be
utilized to the fullest extent permitted.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors,
officers, or persons controlling the Company pursuant
to the foregoing provisions or otherwise, the Company has been
informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to 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.
PART F/S
See the Financial Statements annexed to this Registration
Statement.
PART III
Item 1. Index to Exhibits.
The following exhibits are filed with this Registration
Statement:
3.1 Certificate of Incorporation (Delaware)(1)
3.2 Certificate of Amendment (Delaware) (filed October 19,
1994)(1)
3.3 Certificate of Amendment (Delaware) (filed December 19,
1997)(1)
3.4 Certificate of Merger (Delaware)(1)
3.5 Articles of Merger (Nevada)(1)
3.6 By-Laws(1)
4.1 Specimen Certificate for shares of Common Stock(1)
4.2 Agreement and Plan of Merger(1)
10.1 Consulting Agreement with Donalson Capital Corporation(1)
10.2 Acquisition and Stock Transfer Agreement by and among
the Company, Robert Powell, Sr. and Total Technology,
Inc.(1)
23.1 Consent of Kempisty and Company, Independent Certified
Public Accountants
27 Financial Data Schedule
___________________________
(1) Filed as an exhibit to the Company's Registration Statement on
Form 10-SB filed on January 13, 2000, and incorporated by reference
herein.
Item 2. Description of Exhibits.
See Item 1 above.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELCO-TECHNOLOGY, INC.
(Registrant)
Date: February 25, 2000 By:/s/Donald R. McKelvey
Donald R. McKelvey,
Chairman of the Board and President
TELCO-TECHNOLOGY, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999
INDEX
PAGE
INDEPENDENT AUDITORS' REPORT F2
BALANCE SHEETS F3
STATEMENTS OF OPERATIONS F4
STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY F5
STATEMENTS OF CASH FLOWS F6-F7
NOTES TO FINANCIAL STATEMENTS F8-F14
KEMPISTY & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS, P.C.
15 MAIDEN LANE - SUITE 1003 - NEW YORK, NY 10038
TEL (212) 406-7272 - FAX (212) 513-1930
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Telco-Technology, Inc.
We have audited the accompanying balance sheets of Telco-Technology,
Inc. as of December 31, 1999 and 1998 and the related statements of
operations, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the statement
of financial condition is 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 Telco-
Technology, Inc. as of December 31, 1999 and 1998 and the
results of its' operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note 3, in June, 1999, the Company disposed of its
Massachusetts operation (its only operating division). Management
expects that this transaction will allow the Company to focus on
other business opportunities.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 9 to the financial statements, the Company has suffered
recurring losses from operations that raise substantial doubt about
the ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 9. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Kempisty & Company
Certified Public Accountants, P.C.
New York, New York
February 10, 2000
TELCO-TECHNOLOGY, INC.
BALANCE SHEETS
December 31, December 31,
1999 1998
ASSETS
Current Assets
Cash and cash equivalents $ 26,965 $ 226,719
Net assets
(of discontinued operations) - 94,826
Total Current Assets 26,965 321,545
Other Assets
Due from related party - 31,958
Loan receivable from
former officer (Note 8) - 189,866
Loan receivable
from officer (Note 8) 218,006 223,106
Total Other Assets 218,006 444,930
TOTAL ASSETS $ 244,971 $ 766,475
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and
accrued expenses $ 18,000 $ 18,000
Due to related party (Note 4) 8,042 $ -
Total Current Liabilities 26,042 18,000
Commitment and Contingencies (Note 5)
Stockholders' Equity
Preferred stock
(2,000,000 shs authorized
.001 par value,
none issued and/or outstanding) - -
Common stock
(13,000,000 shs
authorized .001 par value
8,869,944 and 6,762,944 issued)
(Note 7) 8,870 6,763
Common stock to be issued
3,012,000 shares for services - 390,720
Capital in excess of par value 2,975,369 2,768,135
Deficit (2,765,310) (2,417,143)
Total Stockholders' Equity 218,929 748,475
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 244,971 $ 766,475
See Notes to Financial Statements.
TELCO TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
1999 1998
Sales revenues $ - $ -
Cost of sales - -
Gross profit 0 0
General and
administrative expenses 286,569 811,413
Loss from operations (286,569) (811,413)
Other income and expenses
Interest income 3,472 7,541
Other income - 39,800
Income (loss) from
continuing operations
before taxes (283,097) (764,072)
Provision for income taxes - -
Net income (loss) from
continuing operations (283,097) (764,072)
Income (loss) from
discontinued operations
(net of income taxes) (65,070) 32,410
Net loss $(348,167) $(731,662)
Basic and diluted earnings
(loss) per common share: (0.03) (0.13)
Continuing operations
Discontinued operations (0.01) 0.01
Total (0.04) (0.12)
Basic and diluted average
shares outstanding 8,782,629 6,179,108
See Notes to Financial Statements.
TELCO-TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
($.001) Par Value Stock To
Shares Amount Be Issued
Balance January 1, 1998 5,962,944 $ 5,963 0
Sale of common stock 50,000 50 -
Shares issued for services 250,000 250 -
Shares to be issued to
Chairman for compensation
(3,000,000 shares) - - 390,000
Shares to be issued to
outside third party
for services
(12,000 shares) - - 720
Shares issued to officers
for compensation 500,000 500 -
Rent adjustment - - -
Amortization of unearned
compensation - - -
Loss for year ended
December 31, 1998 - - -
Balance
December 31, 1998 6,762,944 6,763 390,720
Shares issued for services 12,000 12 (720)
Shares issued to
Chairman 3,000,000 3,000 (390,000)
Shares received for
Massachusetts operation (950,000) (950) -
Shares issued for services 45,000 45 -
Rent adjustment from
related party - - -
Loss for year ended
December 31, 1999 - - -
Balance December 31, 1999 8,869,944 $8,870 $ 0
See Notes to Financial Statements.
TELCO-TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Capital In Unearned
Excess Of Compen-
Par Value sation Deficit Total
Balance January 1, 1998 $2,606,485 $(148,612) $(1,685,481) $778,355
Sale of common stock 8,400 - - 8,450
Shares issued for services 35,750 - - 36,000
Shares to be issued to
Chairman for compensation
(3,000,000 shares) - - - 390,000
Shares to be issued to
outside third party for services
(12,000 shares) - - - 720
Shares issued to officers
for compensation 99,500 - - 100,000
Rent adjustment 18,000 - - 18,000
Amortization of unearned
compensation - 148,612 - 148,612
Loss for year ended
December 31, 1998 - - (731,662) (731,662)
Balance
December 31, 1998 2,768,135 0 (2,417,143) 748,475
Shares issued for services 708 - - 0
Shares issued to
Chairman 387,000 - - 0
Shares received for
Massachusetts operation (202,929) - - (203,879)
Shares issued for services 4,455 - - 4,500
Rent adjustment from
related party 18,000 - - 18,000
Loss for year ended
December 31, 1999 - - (348,167) (348,167)
Balance
December 31, 1999 $2,975,369 $0 $(2,765,310) $218,929
See Notes to Financial Statements.
TELCO-TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
1999 1998
Operating Activities
Net income or (loss)
from continuing operations $(283,097) $(764,072)
Adjustments to reconcile
net income or (loss)
to net cash used by
operating activities:
Amortization of
unearned compensation - 148,612
Common stock issued
for services 4,500 36,720
Common stock issued
or to be issued
for officers compensation - 490,000
Rent adjustment 18,000 18,000
Changes in operating assets
of continuing
operations:
Due to and from related party 40,000 -
Accounts payable - 500
Net cash used by
continuing operations (220,597) (70,240)
Net cash provided(used)
by discontinued operations 1,031 (14,823)
Investing Activities
Loans made to officers (50,000) -
Repayment of officers' loans 69,812 38,848
Net cash provided(used)
by investing activities 19,812 38,848
Financing Activities
Sale of common stock - 8,450
Net cash provided by
financing activities 0 8,450
Increase (decrease) in cash (199,754) (37,765)
Cash at beginning of period 226,719 264,484
Cash at end of period $ 26,965 $ 226,719
Supplemental Disclosures of Cash Flow Information:
Cash paid during year for:
Interest $ - $ -
Income taxes $ - $ -
See Notes to Financial Statements.
TELCO-TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS (continued)
For the Year Ended
December 31,
1999 1998
Supplemental Disclosures
of Cash Flow Information
Non-cash investing
and financing activities:
Issuance of common stock for
officers compensation $ - $ 490,000
Issuance of common stock for
services $ 4,500 $ 36,720
Receipt of common stock
for forgiveness of
officer loan and net assets
of discontinued
operation $204,942 $ -
See Notes to Financial Statements.
TELCO-TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999 and 1998
Note 1- ORGANIZATION AND OPERATIONS
The Company was incorporated as Haycock Morrison Inc. in the state of
Nevada on November 23, 1993. On January 27, 1995 Haycock entered
into an acquisition agreement with Telco-Technology, Inc. ("Telco").
Pursuant to the acquisition terms, Haycock issued 5,000 shares of
stock, which represented 60% of the outstanding shares of Haycock's
common stock.
After giving effect to the above transaction, the Company ceased all
activities as Haycock and changed its name to Telco-Technology, Inc.
Telco continued its business operations of providing long distance
telephone services and computer networks for voice and data
transmissions. In 1998 the Company was reorganized as a Delaware
Corporation.
On June 15, 1999, the Company sold its Massachusetts operation to a
company affiliated with a former officer and director of the Company
in exchange for the return of 950,000 shares of stock to the Company,
and the assumption of all liabilities of the Massachusetts operation.
The agreement also includes the cancellation of the former officer's
debt to the Company. As a result of this sale the Company can now be
defined as a "shell" corporation, whose principal business is to
locate and consummate a merger or acquisition with an ongoing
business.
Note 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid investments with a maturity of three months or less
at acquisition to be cash equivalents.
Income Taxes
The Company previously adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", ("SFAS No.109")
which requires the asset and liability method of accounting for
income taxes. Enacted statutory tax rates are applied to temporary
differences arising from the differences in financial statement
carrying amounts and the tax basis of existing assets and
liabilities. Due to the uncertainty of the realization of income tax
benefits, (Note 6), the adoption of SFAS No. 109 had no effect on the
financial statements of the Company.
Note 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings (Loss) Per Share
During 1998 the Company adopted SFAS No. 128, "Earnings Per Share",
which requires the reporting of both basic and diluted earnings per
share. Net income per share-basic is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding for the period.
Concentration of Credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist of cash deposits at commercial
banks and receivables from an officer and director of the Company.
Cash and cash equivalents are temporarily invested in interest
bearing accounts at one financial institution and may, at times,
exceed insurable amounts. The Company believes it mitigates its risk
by investing in or through major financial institutions.
Recoverability is dependent upon the performance of the institution.
Receivables from an officer of the Company (Note 8) are unsecured and
represent a concentration of credit risk due to the common employment
and financial dependency of this individual on the Company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive Income
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 requires an entity to report comprehensive
income and its components and increases financial reporting
disclosures. This standard has no impact on the Company's financial
position, cash flows or results of operations since the Company's
comprehensive income is the same as its reported net income for 1999
and 1998.
Note 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities and loans receivable from officers are reflected
in the financial statements at fair value because of the short-term
maturity of these instruments.
Accounting Policies Applied to Discontinued Operations
Revenue Recognition
Revenues are recorded at the time of shipment of products or
performance of services. (Applied to discontinued operations)
Depreciation and Amortization
The cost of furniture and equipment is depreciated over the estimated
useful lives of the related assets. The cost of leasehold
improvements is amortized over the lesser of the length of the
related lease or the estimated useful life of the assets.
Depreciation is computed on a straight line basis for financial
reporting purposes and on an accelerated basis for income tax
purposes. (Applied to discontinued operations)
Inventories
Inventories are stated at the lower of cost determined by the FIFO
method, or market.
Note 3- DISCONTINUED OPERATIONS
In June, 1999 the Company sold its Massachusetts operations to a
former officer and director of the Company, and a new company he is
affiliated with, formed to acquire the Company's Massachusetts
operation. The sales agreement required the officer to return
950,000 shares of the Company's restricted common stock to the
Company and as part of this agreement approximately $118,000 in
monies due the Company was forgiven. The Company transferred
approximately $151,000 in assets and $65,000 in liabilities to the
new company, which also assumed all future liabilities
of the Massachusetts operation, as defined in the agreement.
Following this transaction, the officer no longer owns any of the
Company's common stock.
The disposal of the Massachusetts operation has been accounted for as
a discontinued operation and, accordingly, its net assets
(liabilities) have been segregated from continuing operations in the
accompanying balance sheet, and its operating results are segregated
and reported as discontinued operations in the accompanying
statements of operations and cash flows.
Note 3- DISCONTINUED OPERATIONS (continued)
Information relating to the discontinued Massachusetts operations for
the six months ended June 30, 1999 and year ended December 31, 1998
are approximately as follows:
Six months Year ended
ended December 31,
June 30, 1999 1998
Net sales $ 537,000 $ 1,067,000
Cost of sales (459,000) (726,000)
Gross profit 78,000 341,000
Operating costs (148,000) (309,000)
Income (loss)
before income taxes (70,000) 32,000
Less income tax
benefit (expense) - -
Net (loss) income $ (70,000) $ 32,000
The net assets and liabilities of the discontinued Massachusetts
operations included in the accompanying balance sheet as of December
31, 1998 are approximately as follows:
Current assets:
Cash $ 9,000
Accounts receivable 110,000
Inventory 14,000
Total current assets 133,000
Current liabilities:
Accounts payable
and accrued expenses 47,000
Total current liabilities 47,000
Net current assets
(liabilities) 86,000
Net property,
plant and equipment 9,000
Net assets from
discontinued operations $ 95,000
Note 4- RELATED PARTY TRANSACTIONS
In March, 1995 the Company entered into a three year consulting
agreement with Donalson Capital Corporation, a company owned by the
Chairman of the Board of Directors of Telco-Technology, Inc. This
three year agreement, providing for a fee of $120,000 per year was
paid for in full by the Company issuing 120,000 shares of common
stock in 1996. The expense was amortized over the 36 month period of
the agreement. In March 1998, the agreement was extended to December
1998 at a rate of $10,000 per month. In January 1999, the Company
entered into a new three year consulting agreement with Donalson
Capital Corporation expiring in December 2001, providing for a
$10,000 monthly fee during the term of the agreement. At December
31, 1999 a balance of $8,042 was owed under the agreement.
Note 4- RELATED PARTY TRANSACTIONS (continued)
In December of 1998, an officer of the Company received 500,000
shares of restricted common stock as additional compensation. The
Company valued this stock at $0.20 per share, or $100,000.
Additionally, the Company agreed to issue 3,000,000
restricted shares valued at $0.13 per share or $390,000 for services
performed during 1998. These shares which were issued in 1999 were
valued at market prices in effect on the date the Company committed
to the additional compensation.
The Company currently maintains its offices in the home of its
Chairman pursuant to an oral agreement on a rent free, month to month
basis. The Company has provided for rent of $1,500 per month in its
financial statements. Therefore, rent expense of $18,000 per year is
reflected for the years 1999 and 1998.
Note 5- COMMITMENTS AND CONTINGENCIES
Securities and Exchange Commission Investigation
In May 1997, the Company was notified by the Securities and Exchange
Commission of a formal order of a private, non-public investigation
of certain issues related to the Company's stock trading. In August
1997, the Company supplied copies of various books and records to the
Commission who then deposed some of the Company's officers. Since
that time, the Company has received no further notification from the
Commission. Based upon its examination of this matter and discussions
with Counsel, management does not expect, in the event any further
action is taken by the Commission, that such action will result in an
unfavorable outcome to the Company or have a material adverse effect.
Note 6- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Year ended December 31,
1999 1998
Current:
Federal tax expense $(112,000) $(207,000)
State tax expense (32,000) (60,000)
Deferred:
Federal tax expense 112,000 207,000
State tax expense 32,000 60,000
$ - $ -
Note 6- INCOME TAXES (continued)
A reconciliation of differences between the statutory U.S. federal
income tax rate and the Company's effective tax rate follows:
Year ended December 31,
1999 1998
Statutory federal income tax 34% 34%
State income tax-net of
federal benefit 5% 5%
Valuation allowance -39% -39%
0% 0%
The components of deferred tax assets and liabilities were as follows:
December 31,
Deferred tax assets: 1999 1998
Net operating
loss carryforward $2,690,000 $2,313,000
Total deferred tax assets 2,690,000 2,313,000
Valuation allowance (2,690,000) (2,313,000)
Net deferred tax assets $ - $ -
SFAS No, 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets will
not be realized. At December 31, 1998, a valuation allowance for the
full amount of the net deferred tax asset was recorded because of
continuing losses and uncertainties regarding the amount of
taxable income that would be generated in future years.
The Company recognized losses for the years ended December 31, 1999
and 1998. The amount of available additional net operating loss
carryforwards are approximately $377,000 for 1999, $703,000 for 1998,
$800,000 for 1997, $510,000 for 1996 and $300,000 for 1995. The net
operating loss carryforwards, if not utilized, will expire in the
years 2005 through 2014. The use of these carryforwards is subject
to limitations imposed by the Internal Revenue Service in the event
of a change in control.
Note 7- COMMON STOCK
During 1999 and 1998 the Company issued 57,000 and 250,000 shares of
common stock to unrelated parties for consulting fees, professional
fees, public relations fees and finders fees. The stock was valued
at prices ranging from $0.06 to $0.169 per share. These values were
based upon both current market prices at the time the shares were
issued, and whether the shares were free-trading or restricted. (No
discount for restricted common stock was taken.) The above share
issuances resulted in expenses of $4,500 in 1999 and $36,000 in 1998.
Note 7- COMMON STOCK (continued)
Reincorporation and Exchange of Stock
In January 1998, the Company changed its corporate domicile from
Nevada to Delaware in a tax-free statutory merger. The
reorganization changed the authorized shares of common stock
outstanding from 50,000,000 to 13,000,000 common stock shares (par
value per share remained unchanged) and authorized 2,000,000 shares
of preferred stock.
During 1998 the Company issued 500,000 restricted shares of common
stock to an officer and director for additional compensation. The
Company issued 3,000,000 additional restricted shares of common stock
to this person, in 1999 for 1998 services.
Preferred Stock
The Company has authorized 2,000,000 shares of preferred stock, but
none are issued or outstanding.
The Board of Directors of the Company is authorized to provide for
the issuance from time to time, in one or more series, of any number
of shares of Preferred Stock, and to fix the designations, powers,
preferences, rights, qualifications, limitations and restrictions of
each such series.
Note 8- LOANS TO OFFICERS
December 31, December 31,
1999 1998
Loan to former officer $- $189,866
Loan to officer $218,006 $223,106
The loans to former officer and officer are unsecured, non-interest
bearing with no specific terms of repayment. At June 30, 1999 the
balance of the loan to the former officer of approximately $118,000
was forgiven as part of the sale of the Massachusetts operation (Note
3).
Note 9- FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred net losses from continuing operations of
$283,000 and $484,000 in 1999 and 1998, respectively.
With the sale of the Company's only operating division in June, 1999
(see Note 3) the Company has no operations.
Management expects that this transaction will allow the Company to
focus on other business opportunities.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the use in this Registration Statement on Form 10-SB
of our report included herein dated February 10, 2000, relating to
the financial statements of Telco-Technology, Inc.
/s/Kempisty & Company
New York, New York Kempisty & Company
February 25, 2000 Certified Public
Accountants, P.C.
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,965
<SECURITIES> 0
<RECEIVABLES> 218,006
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,965
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 244,971
<CURRENT-LIABILITIES> 26,042
<BONDS> 0
<COMMON> 8,870
0
0
<OTHER-SE> 210,059
<TOTAL-LIABILITY-AND-EQUITY> 244,971
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 286,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (283,097)
<INCOME-TAX> 0
<INCOME-CONTINUING> (283,097)
<DISCONTINUED> (65,070)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (348,167)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
</TABLE>
