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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(POST EFFECTIVE AMENDMENT NO. 2)
ALPHACOM, INC
--------------------------------------------------------------------------------
(Exact name of small business issuer in its charter)
NEVADA
7372
34-1868605
--------------------------------------------------------------------------------
(State or jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer Identification No.)
1035 ROSEMARY BOULEVARD, AKRON, OHIO 44306 (330) 785-5555
--------------------------------------------------------------------------------
(Address and telephone number of principal executive offices)
1035 ROSEMARY BOULEVARD, AKRON, OHIO 44306
--------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
ROBERT SNYDER, 1035 ROSEMARY BOULEVARD, AKRON, OHIO 44306 (330) 785-5555
--------------------------------------------------------------------------------
(Name, Address and telephone number of agent for service)
COPIES TO:
MILES GARNETT, ESQ., 66 WAYNE AVENUE, ATLANTIC BEACH, NY 11509 (516) 371-4598
Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
Common Stock 1,900,000 $5.00 $9,500,000 $2,745.60
Rescission Shares 900,000 $1.00 $ 900,000
Title of each Share Proposed maximum Proposed maximum Amount of
class of securities amount to be offering price aggregate registration fee
to be registered registered per unit offering
price
</TABLE>
Total Number of Pages
Exhibit List - Page
<PAGE> 2
Note: Specific details relating to the fee calculation shall be furnished in
notes to the table, including references to provisions of Rule 457 (Section
230.457 of this chapter) relied upon, if the basis of the calculation is not
otherwise evident from the information presented in the table. If the filing fee
is calculated pursuant to Rule 457(o) under the Securities Act, only the title
of the class of securities to be registered, the proposed maximum aggregate
offering price for that class of securities and the amount of registration fee
need to appear in the Calculation of Registration Fee table. Any difference
between the dollar amount of securities registered for such offerings and the
dollar amount of securities sold may be carried forward on a future registration
statement pursuant to Rule 429 under the Securities Act.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PURPOSE OF POST EFFECTIVE AMENDMENT -- This Post Effective Amendment is filed to
update the financial statements.
-ii-
<PAGE> 3
PROSPECTUS DATED: AUGUST 10, 2000
ALPHACOM, INC.
2,800,000 SHARES OF COMMON STOCK
THE PURCHASE PRICE FOR 1,900,000 OF OUR
SHARES OFFERED TO THE PUBLIC IS $5.00.
COMMITMENT UNDER RESCISSION STOCK FOR
900,000 SHARES AT $1.00
[ALPHACOM LOGO]
We will sell the shares ourselves and do not plan to use underwriters or pay any
commissions. We will be selling our shares in a direct participation offering
and no one has agreed to buy any of our shares. The offering will terminate no
later than October 31, 2000, and unless a minimum of 876,000 shares are sold or
exchanged by that time the proceeds will be returned with interest. We will
escrow the proceeds with National City Bank, NA until the minimum is reached.
Concurrently with this offering, we are also conducting a rescission offering to
buy or exchange on a share for share basis up to 900,000 shares previously
issued by us. All shares exchanged will reduce our minimum offering share for
share.
Prior to this offering, there has been no public market for the shares and there
can be no assurance that such a market will develop. The offering price for the
common stock has been arbitrarily determined by us. The minimum subscription is
100 shares and the maximum subscription is 10,000 shares.
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK. SEE THE CAPTION "RISK FACTORS" COMMENCING ON PAGE 5.
<TABLE>
<CAPTION>
TOTAL
PER SHARE MINIMUM MAXIMUM
--------- ---------- -----------
<S> <C> <C> <C>
Public offering price $5.00 $4,380,000 $9,500,000
Rescission Shares $1.00 $900,000 $900,000
Underwriting discounts and commissions none none none
Proceeds, before expenses, to us $4,380,000 $10,400,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 4
[ALPHACOM LOGO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary..................................................... 3
Our Company................................................. 3
The Offering................................................ 3
Risk Factors................................................ 5
Use of Proceeds............................................. 6
Dilution.................................................... 7
Capitalization.............................................. 9
Plan of Distribution........................................ 9
Management Discussion of Analysis of Financial Condition and
Results of Operations.................................... 9
Year 2000 Readiness Disclosure.............................. 12
Business.................................................... 13
Principal Shareholders...................................... 20
Management.................................................. 21
Certain Transactions........................................ 25
Description of Securities................................... 26
Shares Eligible for Future Sale............................. 27
Available Information....................................... 27
Dividend Policy............................................. 28
Stock Transfer Agent........................................ 28
Experts..................................................... 29
Legal Matters............................................... 29
Index to Financial Statements............................... F-1
</TABLE>
<PAGE> 5
SUMMARY
OUR COMPANY
Our company, AlphaCom, Inc., is an innovator in communication technology.
We were incorporated on December 1, 1997 under the laws of the State of Nevada.
Our offices are located at 1035 Rosemary Boulevard, Akron, Ohio 44306, and the
telephone number is (330) 785-5555.
THE OFFERING
SHARES OFFERED TO THE PUBLIC FOR CASH
COMMON STOCK OFFERED
FOR SALE HEREBY UP TO A MAXIMUM OF 1,900,000 SHARES OF
COMMON STOCK.
OFFERING PRICE $5.00 per share. The shares are being sold
on a "best efforts" basis.
TERMS OF THE OFFERING A minimum offering of 420,000 shares at
$5.00 per share for an aggregate "minimum
offering proceeds" of $4,380,000. Offering
proceeds will be held in escrow until
subscriptions reach the minimum offering.
However a credit of $1.00 will be applied
toward the escrow for each share of stock
that is issued in exchange for an
unregistered rescission share as a part of
the rescission offer, so the minimum
offering proceeds may be as low as
$3,480,000 if all rescission shares are
exchanged for new registered shares of
common stock. If we reach the minimum
offering, all escrowed proceeds will be
released and used for the purposes described
in Use of Proceeds hereinafter. If we do not
sell the necessary minimum shares, we will
return all proceeds to the subscribers along
with the pro-rata interest earned on the
funds. The offering will remain open until
October 31, 2000, unless we decide to
terminate selling efforts before then.. The
minimum subscription per investor is 100
shares and the maximum subscription is
10,000 shares. The numbers below do not
reflect any shares that may be repurchased
in the Rescission offer.
AUTHORIZED AND
OUTSTANDING SHARES COMMON
OF STOCK STOCK
Outstanding:
* Prior to offering 12,499,842
* After minimum
offering 13,375,842
* After maximum
offering 15,299,842
3
<PAGE> 6
USE OF NET PROCEEDS We intend to retire debt, acquire patents,
and pay accrued expenses. If we raise the
maximum, we will retire additional debt,
reduce accounts payable, increase research
and development, purchase equipment and
increase general working capital.
SHARES OFFERED IN EXCHANGE UNDER THE RESCISSION OFFER
COMMON STOCK OFFERED
IN EXCHANGE HEREBY UP TO A MAXIMUM OF 900,000 SHARES OF OUR
COMMON STOCK.
OFFERING PRICE EXCHANGE FOR ONE SHARE OF RESCISSION STOCK
PURCHASED ORIGINALLY AT $1.00 PER SHARE FOR
ONE SHARE OF COMMON STOCK OFFERED HEREWITH.
TERMS OF THE EXCHANGE
OFFERING A MAXIMUM OF 900,000 SHARES OF COMMON STOCK
MAY BE EXCHANGED FOR UP TO 900,000
UNREGISTERED RESCISSION SHARES ON A ONE FOR
ONE BASIS. THE HOLDER OF THE RESCISSION
SHARES MAY ELECT TO RECEIVE A REFUND IN CASH
PLUS ACCRUED INTEREST AT THE STATUTORY RATE
FOR THE STATE, IN LIEU OF THE EXCHANGE.
THE 900,000 UNREGISTERED RESCISSION SHARES
INCLUDE 779,823 SHARES ISSUED IN THE STATE
OF OHIO (WITH ACCRUED INTEREST OF $143,038
AT JUNE 30, 2000- COMPUTED AT 10%). SUCH
SHARES ISSUED IN OTHER STATES INCLUDE
44,700 SHARES IN PENNSYLVANIA (ACCRUED
INTEREST OF $4,290 AT 6%); 10,500 SHARES IN
VIRGINIA (ACCRUED INTEREST OF $1,156 AT
6%); 10,000 SHARES IN NEW JERSEY (ACCRUED
INTEREST OF $1,833 AT 10%); 9,600 SHARES IN
CALIFORNIA (ACCRUED INTEREST OF $1,760 AT
10%); 9,600 SHARES IN NORTH CAROLINA
(ACCRUED INTEREST OF $1,408 AT 8%); 8,500
SHARES IN FLORIDA (ACCRUED INTEREST OF
$1,559 AT 10%); 8,500 SHARES IN NEW YORK
(ACCRUED INTEREST OF $1,404 AT 9%); 7,000
SHARES IN MARYLAND (ACCRUED INTEREST OF
$1,284 AT 10%); 6,500 N MICHIGAN (ACCRUED
INTEREST OF $716 AT 6%); AND 5,277 SHARES
IN VARIOUS OTHER STATES.
4
<PAGE> 7
RISK FACTORS
The securities offered hereby are highly speculative and involve
substantial risks. Prospective investors should carefully consider the following
risk factors before making an investment decision.
WE MAY HAVE COMMITTED A VIOLATION OF SECURITIES LAWS AND HAVE A CONTINGENT
LIABILITY, PLUS ACCRUED INTEREST, RELATED TO RESCISSION SHARES.
We have a contingent liability consisting of $900,000 plus accrued interest
of approximately $159,100 at June 30, 2000, relating to a previous sale of
founders shares and a related loan of the purchase price proceeds to us. During
the fall of 1998, approximately 970,000 shares of founders stock were privately
sold to our distributors, which were not sold pursuant to a registration
statement on file with the SEC. The federal and state securities laws require
registration of securities unless an appropriate exemption from the registration
requirements of those laws is available. In an attempt to correct any possible
securities laws violation, a rescission offer for stock purchased by this group
was begun on March 25, 1999. As a result of this rescission offer, purchasers of
approximately 55,000 shares requested and received a cash refund. If an
exemption did not exist for the sale of securities privately sold, we may have
violated the registration requirements. We make no admission of any violation of
federal securities laws. The remaining purchasers may either receive a like
number of shares registered in this offering or still may receive a cash refund
with interest. In the event no other shares are sold, we would have to borrow
additional funds to fund the rescission.
WE HAVE UNCERTAIN PROFITABILITY DUE TO A LIMITED OPERATING HISTORY, A HISTORY OF
LOSSES, EXPECTATION OF FUTURE LOSSES AND A "GOING CONCERN" QUALIFICATION BY OUR
INDEPENDENT ACCOUNTANTS.
We were formed in December 1997, and therefore have only a limited
operating history upon which an evaluation of our prospects can be made. Such
prospects must be considered in light of the substantial risk, expenses and
difficulties encountered by new entrants into the Internet services industry. We
have incurred losses from inception through June 30, 2000 in the amount of
($6,202,624). Our independent accountants have issued a "going concern"
qualification based on their review of our financial statements. We expect to
continue to incur net losses as we continue to expend substantial resources on
sales, marketing and administration, and the development of our products. We do
not anticipate operating net income until the end of the third quarter of the
year 2000. In addition, we currently intend to increase our capital expenditures
and operating expenses in order to expand our network to support additional
expected subscribers in existing and future markets and to market and provide
services to a growing number of potential subscribers. There can be no assurance
that we will achieve or sustain profitability or positive cash flow from our
operations.
WE EXPECT TO HAVE FUTURE ADDITIONAL CAPITAL REQUIREMENTS WHICH MAY BE
UNAVAILABLE OR TOO COSTLY.
We must raise at least $4,380,000 in this offering, less up to $900,000 if
all shares subject to rescission are exchanged for shares, or we will need
immediate additional capital, which may be unavailable or too costly. Assuming
we raise the minimum amount, we do not anticipate needing additional capital in
the following twelve months.
Our future capital requirements will depend on numerous factors, including
the rate of market acceptance of our products and services, our ability to
maintain and expand our customer base, the rate of expansion of our network
infrastructure, the level of resources required to expand our market and
distributor organization, information systems and research and development
activities, the pricing and timing of acquisitions, the availability of hardware
and software provided by third party venders and other factors. The timing and
amount of such capital requirements cannot be accurately predicted. If capital
requirements vary materially from those currently planned, or if we are unable
to sell the entire amount of the Offering, we may require additional financing
sooner than anticipated. We have no commitments for any additional financing,
and there can be no assurance that any such commitments can be obtained on
favorable terms, if at all.
Any additional equity financing may be dilutive to our shareholders, and
debt financing, if available, may involve restrictive covenants with respect to
dividends, raising future capital and other financial and
5
<PAGE> 8
operational matters. If we are unable to obtain additional financing as needed,
we may be required to reduce the scope of our operations or our anticipated
expansion, which could have a material adverse effect on our business, operating
results and financial condition.
THERE ARE CONSIDERABLE RISKS IN RELYING ON AND RELATING TO OUR ACQUISITION
STRATEGY, HOWEVER, THERE CAN BE NO ASSURANCE THAT WE WILL SUCCESSFULLY IDENTIFY
OR ACQUIRE ACQUISITIONS ON FAVORABLE TERMS IN THE FUTURE.
We expect to continue our strategy of searching for new technologies, not
other companies, in our target markets, including those which could be material
in size and scope. We believe that our future growth depends, in part, upon the
success of this strategy. This strategy resulted in the development of our
Network Utility software and the contract to purchase all current U.S. and
potential worldwide patent rights to VMSK (for $3,000,000). There can be no
assurance that we will successfully identify or acquire acquisitions on
favorable terms in the future. We may in the future face increased competition
for acquisition opportunities, which may inhibit our ability to consummate
suitable acquisitions and increase the costs of completing acquisitions. No
assurances can be given that any acquisition by us will occur, and that if an
acquisition does occur, that it will be successful in enhancing our business. In
addition, shareholders will not be able to review or vote on any such
acquisition, if or when made. There are no pending (other than the VMSK
contract) or contemplated acquisitions.
EVEN AFTER THE OFFERING IS SOLD, CONTROL WILL BE MAINTAINED BY THE CURRENT
STOCKHOLDERS, AND INVESTORS WILL HAVE TO RELY ON SENIOR MANAGEMENT FOR ALL
DECISIONS BECAUSE OF THIS CONTROL.
Subject to the limitations of Nevada corporate law, current management will
have control of us through its aggregate stock ownership of approximately 51%,
if the entire offering is sold or 62% if the minimum offering is sold, and will
have the right to perpetuate their status as officers and directors and
therefore conduct our business and affairs. Investors will have to rely on our
senior management for all decisions because of this control, including all
strategic decisions, even of a sale of the Company.
USE OF PROCEEDS
We are seeking a new investment through this offering to finance
acquisition of patents and inventions, retire existing debt, fund research and
development projects and expand our current operations immediately. To achieve
this primary plan, we need to raise $4,380,000, which is the basis of our
minimum cash offering. If we are unable to raise these minimum funds, we will
not be able to execute our primary plan as presently contemplated by management
and we will return all funds received from subscribers. If the minimum amount
required is not raised, we intend to obtain an extension on the due dates for
existing debt, reduce research and development expenditures and if necessary
obtain new borrowings.
The maximum net proceeds from this offering may be as high as $ 9,400,000
in cash and $900,000 in rescission shares. If we are unable to sell all of the
shares offered, the net proceeds would be lower.
In the table below, we have detailed the minimum amount of capital required
for us to operate our business as currently planned. In addition, we have
outlined in order of priority , the manner in which we have available use of the
funds raised, assuming that we sell all of the shares offered. The net proceeds
we would receive from the issuance of all the 2,800,000 shares offered,
including the 900,000 rescission shares, by this offering are estimated to be
approximately $10,300,000. For lesser percentages of shares sold see the table
following. The table also shows how we will use the proceeds of the offering.
6
<PAGE> 9
MINIMUM MAXIMUM
AMOUNT AMOUNT OF
REQUIRED NET PROCEEDS
--------------------------
Proceeds from the Offering $ 4,380,000 $10,400,000
Less: Offering expenses 100,000 100,000
----------- -----------
NET PROCEEDS FROM THE
OFFERING $ 4,280,000 $10,300,000
=========== ===========
USE OF NET PROCEEDS:
Retire existing debt $ 1,300,000 $ 2,655,306
Debt retirement through rescission
offering 900,000 900,000
Acquisition of patents 500,000 3,000,000
Accrued expenses 0 1,330,000
Accounts payable 200,000 770,000
Research & development-molds
for VMSK 0 500,000
Equipment purchases-VMSK 0 1,000,000
General working capital 1,380,000 144,694
----------- -----------
TOTAL USE OF NET PROCEEDS $ 4,280,000 $10,300,000
=========== ===========
The table above contains amounts of proceeds to be used for general working
capital needs, such as salaries, rent and utilities, or such amounts may be used
to build up inventory levels.
DILUTION
We were initially capitalized by the sale of common stock to our founders.
The following table sets forth the difference between our founders and
purchasers of the shares in this offering with respect to the number of shares
purchased from us, the total consideration paid and the average price paid per
share. Founders' shares include 8,025,000 shares issued to the co-founders and
their family members, 1,272,000 shares issued to key employees and advisors and
688 net shares from Alpha Beta Communications.
The table below assumes the minimum (876,000) shares offered hereby are
sold.
<TABLE>
<CAPTION>
TOTAL
SHARES ISSUED CONSIDERATION
----------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Founders 9,297,688 65.14% $ 267,661 3.65% $ 0.029
Investors in Rule 504 offering 1,000,000 7.00 385,031 5.25 0.385
Key employees 196,000 1.37 168,940 2.30 0.862
Distributed to sellers for
acquisition of assets 1,653,354 11.58
ITM consulting contract 132,800 .93 132,800 1.81 1.000
Stock purchase agreement 20,000 .14 100,000 1.36 5.000
Issued in connection with
consulting contract 200,000 1.40 1,000,000 13.63 5.000
---------- ---------- ---------- ---------- ----------
Total prior to offering 12,499,842 87.56 2,054,432 28.01 0.164
New Investors 876,000 6.14 4,380,000 59.73 5.000
Rescission shares 900,000 6.30 900,000 12.27 1.000
---------- ---------- ---------- ---------- ----------
Total 14,275,842 100.00% $7,334,432 100.00% $ 0.514
========== ========== ========== ========== ==========
</TABLE>
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The table below assumes all the shares offered hereby are sold.
<TABLE>
<CAPTION>
TOTAL AVERAGE
SHARES ISSUED CONSIDERATION PRICE
---------------------------------------------------------------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Founders 9,297,688 60.77% $ 267,661 2.15% $ 0.029
Investors in Rule 504 Offering 1,000,000 6.54 385,031 3.09 0.385
Key Employees 196,000 1.28 168,940 1.36 0.862
Distributed to Sellers for
Acquisition of assets 1,653,354 10.80
ITM Consulting Contract 132,800 .87 132,800 1.07 1.000
Stock purchase agreement 20,000 .13 100,000 .80 5.000
Issued in connection with
consulting contract 200,000 1.31 1,000,000 8.03 5.000
----------- ----------- ----------- ----------- -----------
Total prior to offering 12,499,842 81.70 2,054,432 16.50 0.164
New Investors 1,900,000 12.42 9,500,000 76.28 5.000
Rescission shares 900,000 5.88 900,000 7.22 1.000
----------- ----------- ----------- ----------- -----------
Total 15,299,842 100.00% $12,454,432 100.00% $0.814
=========== =========== =========== =========== ===========
</TABLE>
In March of 1999, we made a commitment to a group of individual shareholders
under a rescission offer to issue up to 900,000 shares offered herein at a
discount of 80%. The effect of this commitment is reflected in the above tables.
As of June 30, 2000, the net tangible book value of our common stock was
($4,394,607) or ($.35) per share based on the 12,499,842 shares outstanding.
"Net tangible book value" per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares. After giving
effect to the sale by us of 2,800,000 shares and after deducting estimated
expenses, our pro-forma net tangible book value as of that date would be
$6,005,393 or $0.39 per share, based on the 15,299,842 shares of common stock to
be outstanding at that time. This represents an immediate dilution (the
difference between the offering price per share of common stock and the net
tangible book value per share of common stock after the offering) of $4.61 per
share to the new investors who purchase shares in the offering, as illustrated
in the following table.
The following table represents the dilution per share based on the minimum
and maximum amount of shares being sold:
Minimum Maximum
Shares Sold Shares Sold
----------------------------
900,000 rescission shares $ 1.00 $ 1.00
Offering price to public of 1,900,000 shares $ 5.00 $ 5.00
Net tangible book value before offering $ (0.35) $ (0.35)
Increase attributable to the offering $ 0.38 $ 0.74
Net tangible book value after giving effect
to the offering ($ 0.03) $ 0.39
Per share dilution to new investor $ 5.03 $ 4.61
Percent dilution per share to public 101% 92%
8
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We do not intend to pay any cash dividends with respect to our common stock
in the foreseeable future. We intend to retain any earnings for use in the
operations of our business. Our board of directors will determine dividend
policy in the future based upon, among other things, our results of operations,
financial condition, contractual restrictions and other factors deemed relevant
at the time. We intend to retain appropriate levels of our earnings, if any, to
support our business activities.
CAPITALIZATION
This table represents our capitalization as of June 30, 2000 as
adjusted to give effect to this offering.
<TABLE>
<CAPTION>
MAXIMUM MINIMUM
SHARES SOLD SHARES SOLD
ACTUAL ADJUSTED ADJUSTED
------ -------- --------
<S> <C> <C> <C>
STOCKHOLDERS EQUITY (DEFICIT)
Common stock, $0.001 par value
Authorized 60,000,000 Shares
Issued and outstanding-12,499,842
Shares- actual $ 267,049
Shares as adjusted (15,299,842 and
13,375,842) $ 269,849 $ 267,925
Additional paid in capital 1,747,621 12,144,821 6,126,745
Treasury stock (1,653) (1,653) (1,653)
Deficit accumulated during the
development stage (6,202,624) (6,202,624) (6,202,624)
------------ ------------ ------------
TOTAL STOCKHOLDERS
EQUITY (DEFICIT) ($ 4,189,607) $ 6,210,393 ($ 190,393)
============ ============ ============
</TABLE>
PLAN OF DISTRIBUTION
THIS IS A DIRECT PARTICIPATION WITH NO COMMITMENT BY ANYONE TO PURCHASE ANY
SHARES. THE SHARES WILL BE OFFERED AND SOLD ON A "BEST EFFORTS" BASIS BY OUR
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS AT $5.00 PER SHARE UNTIL ALL SHARES
ARE SOLD OR UNTIL THE OFFERING IS TERMINATED OR OCTOBER 31, 2000. ALL SHARES
HELD BY OFFICERS, DIRECTORS AND SHAREHOLDERS WHO OWN 5% OR MORE OF OUR STOCK
WILL BE HELD IN ESCROW PURSUANT TO AN ESCROW AGREEMENT REQUIRED BY THE OHIO
DIVISION OF SECURITIES. THOSE INSIDER SHARES MAY NOT BE SOLD OR TRANSFERRED FOR
AT LEAST ONE YEAR AND PERHAPS AS LONG AS FOUR YEARS, DEPENDING ON OUR FINANCIAL
PERFORMANCE.
Unless otherwise indicated, the information in this prospectus,
irrespective of the date referenced, assumes that there is no exercise of
outstanding options or warrants to purchase additional shares. The total of all
options and warrants outstanding, if exercised, would result in the issuance of
1,280,000 shares of common stock at $5.00 per share and 32,000 shares of common
stock at $1.00 per share.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We have experienced substantial changes to, and expansion of, our business
and operations since Alpha Beta Communications commenced in March 1996. We
except to expand our business and user base, which will require us to increase
our personnel, develop software, purchase equipment and license content, which
will result in increasing costs.
9
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CASH REQUIREMENTS
In order to finance acquisition of patents and inventions, retire existing
debt, and fund research and development projects, it is our intent to raise
minimum net proceeds of $2,000,000 from this public offering, to supplement
income in fiscal 2000 operations. This will allow us to reduce the time frame to
become fully operational from several years to less than one year. The following
summarizes anticipated cash requirements to achieve these goals. We would
utilize these funds to retire existing debt of $1,300,000, acquire patents of
$500,000 reduce accounts payable of $200,000 and provide working capital of
$1,380,000. Should we not raise the net minimum proceeds from this offering we
would have to increase our debt to fund the aforementioned cash requirements.
RESEARCH AND DEVELOPMENT
------------------------
The costs for developing the plastic molds for VMSK products are estimated
at $500,000.
ACQUISITION OF PATENTS AND INVENTIONS
In order to secure the U.S. world wide patent rights and the potential
international patent rights to VMSK, we entered into a contract to acquire all
past, present and future patents and inventions connected therewith.
NEED FOR ADDITIONAL PERSONNEL
-----------------------------
Since our sales, marketing and distribution system in North America is
multi-level marketing, the projected growth of distributors (independent
contractors) requires no additional costs to us. However, it is
10
<PAGE> 13
anticipated that the number of employees may triple during the next twelve
months, even with our outsourcing many tasks.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
We have financed our growth by incurring short-term debt. We have extended
the due dates on loans and notes payable until August 31, 2000, and such debt
will be retired with the proceeds from this offering. Notes payable and current
portion of debt aggregate $3,777,088 at June 30, 2000, including the liability
for $900,000 in rescission shares. Accounts payable of $636,717 at June 30,
2000, includes the deferral of $500,000 due Telcos for testing data
transmission and will also be retired with proceeds from this offering. Accrued
interest of $260,000, deferred compensation of $137,000 and accrued expenses of
$384,000 at June 30, will also be paid with the proceeds from this offering.
RESULTS OF OPERATIONS
---------------------
The operations through June 30, 2000 reflect the combined accounts of
AlphaCom, Inc. and Alpha Beta Communications. As a development stage company,
our operations do not reflect an accurate trend for future operations. Revenues
generated through June 30, 2000 reflect sales of wireless modems and
internet access, primarily to our distributors for testing purposes. Our network
utility or compression software was launched for beta testing in late July 1999,
which increases the throughput on the wireless modems by at least three times.
We began demonstrations of VMSK in the lab late in 1999. As of June 30,
2000, we were in the process of negotiating foreign licensing contracts and
have closed several aggregating a minimum of $10,640,000. Following are the
combined operating results for the years ended December 31, 1998 and 1999 and
un-audited six-months ended June 30, 1999 and June 30, 2000.
<TABLE>
<CAPTION>
UNAUDITED-SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------------------------------
1998 1999 1999 2000
------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales - Licenses $ 0 $ 0 $ 0 $ 44,041
Sales -Product 223,616 249,185 75,152 187,563
Less cost of sales 82,654 63,883 60,044 192,118
---------- ----------- ----------- ----------
GROSS MARGIN 140,962 185,302 15,108 39,486
Selling, general and
administrative
expenses 1,923,818 2,028,551 877,782 1,660,043
Interest expense 197,639 213,372 89,874 180,652
Provision for
income taxes 0 0 0 0
----------------------------------------------------------
NET INCOME(LOSS) ($1,980,495) ($2,056,621) ($ 952,548) ($1,801,209)
=========================================================
NET INCOME(LOSS)
PER SHARE $ (0.14) $ (0.17) $ (0.08) $ (0.15)
==========================================================
</TABLE>
11
<PAGE> 14
YEAR ENDED DECEMBER 31 1998 AND 1999
SALES
TOTAL 1999 PRODUCT SALES INCREASED 12 % OVER 1998. SALES WERE MADE PRIMARILY TO
DISTRIBUTORS WHO ARE INVOLVED IN TESTING THE PRODUCT BEFORE IT IS OFFERED TO THE
PUBLIC. INCREASES RESULT FROM THE INCREASE IN DISTRIBUTORS.
COST OF SALES
Cost of sales, as a percentage of sales, decreased by 11 % over 1998. This
decrease resulted from volume purchases.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by 6% over 1998, and
resulted primarily from an increase in personnel.
INTEREST EXPENSE
Interest increased by 8% over 1998 reflecting our need to borrow monies to fund
our growth.
PROVISION FOR INCOME TAXES
No provision for income taxes was made for 1998 and 1999, as we incurred losses
during these periods.
SIX-MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000
SALES
Product sales for the six-months ended June 30, 2000 increased by 150% over
the same period in 1999. This increase was the result of expanding our Internet
services and initial software sales. License income represents amortization of
such sales over the 120 months of the contracts.
COST OF SALES
Cost of sales, as a percentage of sales, increased by 3% from the same period
in 1999 relecting our experimenting with methods of improving our products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the six-months ended June 30,
2000 increased by $782,261 or 89% over the same period in 1999. Consulting
fees of $533,328 represented the major increase, along with increase in wages
for additional personnel.
INTEREST EXPENSE
The 101% increase in interest for the six months ended June 30 ,2000 over the
same period in 1999 reflects the increase in debt to fund our growth.
PROVISION FOR INCOME TAXES
No provision for income taxes was made for the six-month periods in 1999 and
2000, as we incurred losses during these periods.
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<PAGE> 15
YEAR 2000 READINESS DISCLOSURE
YEAR 2000 COMPLIANCE. The year 2000 issue involved the potential for system
and processing failures of date-related data resulting from computer controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that contain time-sensitive software have recognized
a date using two digits of "00" as the year 1900 rather than the year 2000. This
could have resulted in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar ordinary business activity.
We defined Year 2000 compliance as follows: information technology time and
date processes, including, but not limited to, calculating, comparing and
sequencing data from, into and between the 20th and 21st centuries. Our
objective was and is that those processes contained in our software and
services, will function accurately, continuously and without degradation in
performance and without requiring intervention or modification in any manner
that would or could adversely affect the performance of such products or the
delivery of such software and services as applicable at any time.
Our internal systems include both information technology systems and
non-information technology systems. We completed an assessment including testing
and any remediation, of our proprietary information technology systems during
1999. With respect to information technology systems provided by third-party
vendors, we sought assurances from such vendors that their technology is year
2000 compliant. All of our material information technology system vendors
replied to inquiry letters sent by us stating that they either are Year 2000
compliant or expected to be so in a timely manner.
Our internal software and hardware systems have functioned properly with
respect to dates in the Year 2000. Additionally, our suppliers and advertising
customers have been Year 2000 compliant. So there has not been a material
adverse affect on our business, results of operations or financial condition.
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<PAGE> 16
BUSINESS
THE COMPANY
We were incorporated on December 1, 1997 in the State of Nevada. Prior to
that time, Mr. Robert Snyder worked out of his basement developing the concept
and potential solutions encountered by those surfing the World Wide Web. On July
1, 1998 we purchased certain limited assets of Alpha Beta Communications,
including its distributor base. For presentation purposes the accounts of Alpha
Beta Communications have been combined from April 19, 1996.
We are providing and will continue to introduce and market new and
innovative hi-tech products and services in the rapidly expanding multi-billion
dollar Internet, Telecommunications and related industries to individual
consumers, small and large businesses, governments and institutions, both
nationally and internationally.
PRODUCTS AND SERVICES
InSat Wireless(TM): We have marketed this product on a test basis since the
third quarter of 1997. We utilize Cellular Digital Packet Data (CDPD) with
specific regions throughout the United States and Canada that presently offer
CDPD technology. The CDPD System overlays the cellular voice network to provide
a wireless extension of existing packet data networks. It provides secure
wireless packet data connectivity (19.2 kilobits/sec) and is based on Industry
Standard Internet Protocol (IP). Although CDPD pricing varies from carrier to
carrier, we will offer a monthly flat rate service. We will take advantage of
our lead in the marketplace with this pricing plan and offer "one stop shopping"
for all peripherals and enhancements using CDPD and applicable hardware and
software.
GSI-V: Keeping with the wireless market, we became a Value Added Reseller
(VAR) for Technology Guardian, Inc. (NASDAQ OTCBB: TEGI). TEGI provides an
asymmetrical (dial-up outbound), high-speed satellite Internet solution for up
to 250 simultaneous users or sessions at up to 500 KBPS downloads called GSI-V.
To date, we have limited sales commencing with the first quarter of 1998, of the
GSI-V, but have interest from financial brokerage firms, schools, and
international sales in Canada and the Bahamas.
Wireline Internet Access and Network Utility (NU): We have been marketing a
traditional dial-up Internet service or wireline service since the first quarter
of 1998. Moreover, we expect to increase the average throughput rate by up to 5
times using our NU software, which we launched in December 1999.
International (Exclusive) Licensing: We plan to sell international
(exclusive) licensing privileges to other companies to expand our network
worldwide. Currently, we are in negotiation with various parties in connection
with licensing in other countries including nine countries in Central America,
Israel, Turkey, the 20 European Union Countries and Russia. We are negotiating
with various parties for distribution of our products and services in other
countries. License fees are determined on a country-by-country basis. In
addition, licensee will pay us an ongoing monthly royalty fee on a per
subscriber basis. Other products and services will be offered on a case-by-case
basis including the anticipated Expressway 2000(TM) FM wireless modem.
PRODUCT DEVELOPMENT PLAN
We will continue to market our wireless modems with its low flat rates in
certain areas and incorporate the NU compression with Very-Minimum-Shift-Keying
or Variable-Phase-Shift-Key (VMSK/VPSK) technology to increase throughput.
VMSK/VPSK technology is projected to increase both the up-link and throughput
speed well above 30 bps/Hz. We anticipate that after successful beta testing, we
will be able to institute a build-out plan for VMSK/VPSK with the end result
being an infrastructure that will offer seamless service throughout North
America and to key locations from around the world. To facilitate the
implementation of the VMSK/VPSK technology, we are in the process of developing
a turnkey value
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<PAGE> 17
added service and revenue center described as "Wireless ISP In A Box" for
existing FM radio operators or private parties doing business with FM radio
operators. In either case, they become Internet service providers in their
respective service area featuring VMSK/VPSK high-speed Internet access and
receive a monthly fee for each customer utilizing the new service. The product
will be called the Expressway 2000 FM Wireless Modem and Expressway 2000
Services.
Radio stations are looking for new sources of revenue. VMSK provides FM
radio stations with an opportunity to offer high throughput Internet access
within their market service area, at a competitive price.
As this would add a substantial ongoing revenue stream without meaningfully
adding to the station's cost structure.
FM radio stations, which participate in our VMSK program, thus may
experience significant enhancement of the station's bottom line results.
Depending on the station's market service area the additional ongoing revenue
stream of $2 per month per Internet access account may indeed be very
substantial.
Participating FM stations will be charged a one-time up-front deposit fee
to cover the cost of VMSK hardware, software and installation. As our cost of
equipment and installation are passed on to the participating stations, our cash
flow and working capital positions will not be encumbered by or adversely
effected by our anticipated rapid expansion of VMSK.
ISP Partners Program: We have successfully launched our ISP (Internet
Service Provider) Partners Program and have already signed a large number of
ISP's. This program gives new strength to existing ISP's in their fight to
maintain their share of the Internet customer base. ISP's are faced with new
technology such as ours that in time will significantly erode their customer
base. Under our Partners Program we make the ISP a distributor of our hardware
and software giving them the high throughputs required to maintain their
customers as well as a favorable competitive price. This ISP Partners Program
also benefits by earning revenue for the sales of our modems, software and
services. We benefit from this program by adding a net $5 per month for every
customer that the ISP converts to our hardware and software products. It also
provides us an almost instant revenue stream and POP's (Point of Presents) for
our distributors to sell hardware and software into areas where we have no POP
or local access to Internet dial-up.
"Wireless ISP In A Box" is a combination of new and innovative technology
packaged for easy delivery and installation in FM radio stations. The fee for
purchasing the rights to deliver this service will be subject to a number of
demographic characteristics specific to each location, such as population,
business and economic conditions: local internet and computer support and
projected number of prospective customers. We plan to launch our new technology
and service in ten (10) key locations (to be announced) throughout 2000. Each FM
radio station is expected to have the capacity to handle a large number of
subscribers. We project capturing a large market share in each area within a
short period of time. To set this plan into action, we will initiate an
aggressive marketing campaign in advance of said wireless service by conduction
seminars in cooperation with the new service provider in that area. The
objective is to create a pent-up demand for the service and to establish a
strong network marketing presence for future growth.
In addition to the introduction of VMSK/VPSK high speed internet access, we
plan to introduce our full motion Video Conferencing software, which is
projected to provide 30 frames per second for our wireless service as well as
existing twisted copper wires or plain Old Telephones Service (POTS) line. What
is unique to this application and how it influences not only the marketing
opportunity but also eventual sales of the video conferencing software is that
it automatically encourages a perpetual flow of new sales due to its requirement
for video conferencing software at both ends of the transmission. One could
liken this concept to that of MCI's very successful "Friends and Family"
promotion, whereby customers were enticed to share the service with family,
friends and others in order for each to create his own personal communication
network.
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<PAGE> 18
TECHNICAL EXPLANATION OF VMSK/VPSK
Very-Minimum-Shift-Keying or Variable-Phase-Shift-Key ("VMSK/VPSK") is
patented under U.S. Patents 4,742,532 and 5,185,765 High Speed Data
Transmission. These patents cover an encoding and decoding method that
compresses ordinary BPSK modulation to transmit digital data at 10 to 25
bits/sec/Hz. Test have been performed as high as 50 bits/sec/Hz. This method
requires 1/10 as much spectral space or less when compared to ordinary AM or FM.
No other method has ever achieved such high levels of compression. Called VMSK/2
modulation, this method does not lose signal power with increasing compression
since the transmission method is always BPSK. Less than 1% as much power is
required for VMSK/2 as would be required for QAMI024, the only known competitor.
Eb/n values of 12-14dB are being realized for EER = 1 in 1 million. The
equipment exists and can be demonstrated. All measurements are confirmed by
recognized independent labs.
New patents are pending on the VMSK/2 modulation method, which is
particularly adaptable to satellite communication and for wireless LANs using
the power line to avoid wiring for the small business or home. The performance
is about double that of the previously patented VPSK method. The new patents are
applicable to VPSK as well and will extend the life of relevant patents to 2016.
A newly developed modulation method for using the supplementary carrier
authorization over ordinary FM stations makes it possible to transmit two high
speed digital information channels, one at 198 Kb/s and the other at 144 Kb/s.
This technology allows the FM broadcasting station to carry the two additional
or hidden programs in addition to its normal programs. The 198 Kb/s data rate of
the primary channel is more than 10 times that being achieved at present by
other services. Time division multiplex and discrete addressing are used to
"peel off" portions to be used by separate customers.
The second hidden channel is a lower data rate channel operation at 144
Kb/s. Video to video conferencing using the MPEG2 compression method requires
only a 144 Kb/s data rate. This standard is excellent for teaching, sales
messages, store casting and other uses requiring video. Control information is
added to insure that only the authorized addressee receives the signal. When not
used for video, sound can be compressed into less than 32 Kb/s with excellent
quality, or the entire channel can be used for data transmission. Sound with the
quality of an AM radio can be carried in the bandwidth along with data. The
space can be dynamically allocated. If there are not video users or sound users
at the moment, the entire 198+144 Kb/s space can be dedicated to data, for
example to internet downloading to addresses, or it can be split to 12-20 audio
voice channels. Compact Disk quality stereo audio can also be transmitted.
Real time video requires a landline capable of carrying data at 160 Kb/s.
These so called ISDN lines are now readily available at higher cost than normal
telephone line service, but are not exorbitantly priced and are coming into
general use for Internet connections. For the occasional high data rate down
load for most Internet users, however his FM-SCA service is an excellent choice
at lower cost than ISDN lines. It compares favorably with, and may even be
superior to Satellite services.
The service is available throughout the coverage area of the FM station.
The extremely good signal to noise ratio for the new APSK sub-carrier modulation
method insures a very low bit error rate for all users. Error correction can be
built into the receiver for critical applications.
Nationwide coverage is available through the use of satellites or the
Internet, with broadcasting at the local site. For users such as churches and
video training providers, the cost compared to cable or satellite use may be
greatly reduced.
HOW VMSK/VPSK WORKS
Two separate high-speed channels are available. For video programs on the
separate video channel, one installs a video conferencing camera on location and
an ISDN telephone line of the type now being used for Internet connections. The
latest MPEG2 video compression insures the highest video quality.
There are two types of video services:
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<PAGE> 19
(1) Time Cueing. A location is polled for a desire message. If it has
a sales announcement, product release or other short message, the
station will accept it in sequence. If desired, the messages
(Color Video and sound) can be recorded at the station for later
broadcast or sequenced and repeated as often as desired. These
are excellent sales media for department stores and supermarkets.
One pays the normal video rate for the time used. This can be
used for telemarketing to Internet download subscribers.
(2) Dedicated. For schools, special training courses, church services
to the home bound etc. A schedule is arranged that will provide
exclusive use to the video channel for the scheduled time. One
pays for the scheduled time and a slight premium.
APPLICATIONS AND HIGHLIGHTS OF VMSK/VPSK AND VMSK/2 TECHNOLOGY
VMSK/VPSK and VMSK/2 technology have the ability to perform the following
applications:
Local area networking over the power line: Low cost LAN carries data at
3400 b/s/Hz over the power lines 80 times the present rate.
Wireless Platforms: Increased revenue can be obtained by increasing the
number of customers on all wireless platforms by including: PCS, Analogue, Cell,
COMA, TOMA, GSM, Microwave LAN, WAN, TELEMETRY, and FM-SCA Data.
Data users: For bulk data transmission for many users, such as stock
quotes, business record transfer, Internet down loads, etc.
Wireless: For applications for Wireline transmissions of data, VMSK can
enhance all existing wireline services, ie.: Utilizing VMSK as alternative to
ADSL and DSL, VMSK can provide three times the distance with less noise and
interference that can be attained by the new digital line services offered by
the telephone companies.
The wireline applications that can be expanded with VMSK could be:
- Local Phone Lines Service
- ISDN services
- Dual ISDN
- Fractional T-1
- T-1
- Cable Line Fiber Optic Networks
MARKET TRENDS
The Internet: The Internet is a collection of computer networks connecting
millions of public and private computers around the world. In its formative
stages, the Internet was used by government agencies and academic institutions
to exchange information publish research and transfer e-mail. A number of
factors, including the proliferation of communication enabled personal
computers, the availability of intuitive graphical user interface software and
the wide accessibility of an increasingly robust network infrastructure, have
combined to allow users to easily access the internet and, in turn, have
produced rapid growth in the number of internet users.
The emergence of the Web, the graphical multimedia environment of the
Internet, has resulted in the development of the Internet as a new mass
communications media. The case and speed of publishing, distributing and
communicating text, graphics, audio and video over the internet has led to a
proliferation
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<PAGE> 20
of internet-based services, including chat rooms, online magazines, news feeds,
interactive games and a wealth of educational and entertainment information, as
well as the development of online communities. In addition, by eliminating many
of the costs involved in executing routine commercial transactions, such as
simple banking services and retail purchases, the Internet is rapidly providing
individuals and organizations with a new medium for conduction business.
Growth of the Internet Market: The consumer online and Internet services
industry is now in an early stage of a growth evolution that is embracing both
consumers and businesses. This growth is created by the internet's ability to
provide in a more appealing, cost and time effective manner, many of the
functions now provided by mail, telephone and television. It is widely
recognized that the evolution of the Internet industry will have enormous
implications for the way individuals communicate, work, learn, and entertain
themselves.
Morgan Stanley Research estimates the demand for online and Internet
services to closely follow personal computer ("PC") penetration within the home
and office. PC penetration recently reached a rate of nearly one-third of all
United States households. This penetration rate is similar to the household TV
penetration level in the early 1960s and is expected to increase to a level
close to the current TV household penetration level of 98% within the next 10 to
20 years.
Today, the world is populated by some 200 million computers according to
Computer Industry Almanac, Inc. They estimate that by the year-end 2001 this
figure will increase to 579 million. Combining these figures with the
dramatically expanding use of the internet, it becomes clear that we are
experiencing a never-before-seen phenomenon: the development of a pervasive
world-wide communication network which transcends borders and which
fundamentally changes the way the world communicates. Matrix Information and
Directory Services estimates that the number of worldwide Internet users will
grow to 707 million by the year 2001.
In this environment, with our advanced communication technology and our
broad and expanding network of independent distributor associates and
international licensees, we are well positioned to provide what the world needs:
integrated facilities to provide the hardware, software and services for
reliable, high throughput wireline and wireless internet access elusive goal of
realizing cost effective, broadly affordable computer voice communication and
teleconferencing. We also project that apart from a burgeoning market and demand
for our products and services in what we tend to refer to as the developed
countries, there will also be a huge demand by lesser developed countries. As
these may lack the wiring infrastructure for modern communications, our wireless
high throughput bandwidth facilities will enable them to leapfrog into modern
21st century communication facilities without having to commit to high
infrastructure cost investments.
DISTRIBUTION METHODS
Marketing in the United States and Canada: Following a careful analysis of
the marketing strengths of our products and services and its initially limited
available resources for traditional marketing we elected to avail ourselves of
the power and dynamics of the well established multi-billion dollar per year
network marketing industry as the method of distribution in the United States
and Canada. With a steadily expanding network of over 4,000 independent
distributors associates currently in place, our goal is to become a dominant
force in the market place with a ready made marketing and distribution channel
for our products and services. Based on our experience in these markets and our
knowledge of the industry, we believe that the combination of a network of
independent distributors motivated by a generous, well though out compensation
package and a range of competitively priced cutting edge electronic
communication products and services will enable us to outperform other companies
in these markets.
Marketing outside of North America: Marketing in countries outside of North
America will be accomplished through licensing agreements with strongly
capitalized parties capable of upfront payments of licensing fees and financing
of initial orders. Licensing agreements for several countries are already in
place.
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COMPETITION
The market for consumer and business Internet services and online content
are extremely competitive and highly fragmented. There are no significant
barriers to entry and we expect that competition will intensify in the future.
Our most direct competition in these markets are ISPs, national long distance
carriers, wireless service providers, OSPs, cable- based data services and
Internet content aggregators. Many of these competitors are offering (or may
soon offer) technologies that will attempt to compete with some or all of our
products and services. Such technologies include ISDN and XDSL. The basis of
competition in these markets include transmission speed, reliability of service,
ease of access, price/performance, ease-of-use, content quality, quality of
presentation, timeliness of content, customer support, operating experience and
revenue sharing.
Many of our competitors and potential competitors have substantially larger
subscriber bases, longer operating histories, greater name recognition and more
established relationships with application providers than us. Such competitors
may be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing internet services than us. There can be no assurances that we will
able to compete successfully against current or future competitors or that
competitive pressures faced by us will not materially adversely effect our
business, operating results or financial condition. Further, as a strategic
response to changes in the competitive environment, we may make certain pricing,
service or marketing decisions or enter into acquisitions or new ventures that
could have a material adverse effect on our business, operating results or
financial condition.
GOVERNMENT REGULATION
FEDERAL
We provide Internet services, in part, though data transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for wire line communications. We currently are
not subject to direct regulation by the FCC or another regulatory agency as a
provider of basic telecommunication services. For example, a number of long
distance telephone carriers recently filed a petition with the FCC seeking a
declaration that Internet telephone service is a "telecommunication service"
subject to common carrier regulation. Such a declaration, if enacted, would
create substantial barriers to our entry into the Internet telephone market. The
FCC has requested comments on this position, but has not set a deadline for
issuing a final decision. Also, a number of local telephone carriers have asked
the FCC to levy access charges on "enhanced service providers," which may be
deemed to include ISPs. Although the Chairman of the FCC has indicated his
opposition to levying service charges against ISPs, local interconnection
charges could be levied in the future. Moreover, the public service commissions
of certain states are exploring the adoption of regulations that might subject
ISPs to state regulation.
The FCC regulates the licensing construction, operation and acquisition of
wireless telecommunications systems in the U.S. pursuant to the 1934 Act, as
amended and the roles, regulations and policies promulgated by the FCC
thereunder. Included in the regulations in the use of the electromagnetic
spectrum in the United States, including the frequency band currently used by
our radio products. Part 15 of the FCC regulations defines frequency bands in
which unlicensed operation of the radio equipment that meets certain technical
and operational requirements is permitted. We utilize CDPD for the majority of
our wireless transmissions, which is currently under FCC regulations.
In the international markets, there are various categories of government
regulations. In those countries that have accepted certain worldwide standards,
such as the FCC rulings or those from the European Telecommunications Standards
Institute, we are not expected to experience significant regulatory issues in
bringing our products to market. Approval in these markets involves retaining
local testing agencies to verify specific product compliance. However, many
developing countries, including the large markets in India and China, have not
fully developed or have no frequency allocation, equipment certification or
telecommunications regulatory standards. In these types of markets, we will
actively work both directly and with industry standard bodies, to conform
regulations to worldwide standards.
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STATE AND LOCAL REGULATION
The scope of the regulatory authority covers such matters as the terms and
conditions of interconnection between Local Exchange Carriers ("LECs") and
wireless carriers with respect to intrastate services, customer billing
information and practices, billing disputes, other consumer protection matters,
facilities construction issues, transfers of control, the bundling of services
and equipment and requirements relating to the availability of capacity on a
wholesale basis. In these areas, particularly, the terms and conditions of
interconnection between LECs and wireless providers, the FCC and state
regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively.
The FCC and a number of state regulatory authorities have initiated
proceedings or indicated their intention to examine access charge obligations,
mutual compensation arrangements for interconnections between local exchange
carriers and wireless providers, the pricing of transport and switching
facilities provided by LECs to wireless providers, the implementation of number
portability to permit customers to retain their telephone numbers when they
change service providers, and alterations in the structure of universal service
funding among other matters.
We may become an active participant in proceedings before the FCC and
before state regulatory authorities. Proceedings with respect to the foregoing
policy issues before the FCC and state regulatory authorities could have
significant impacts on the competitive market structure among wireless providers
and other carriers. We are unable at this point to predict the scope, pace, or
financial impact of policy changes which could be adopted in these proceedings.
To keep it apprised of developments in this area, we will retain special FCC
counsel in the event we deem it necessary.
RECENT EVENTS
The 1996 Act mandates significant changes in existing regulation of the
telecommunications industry to promote competitive development of new service
offerings, to expand public availability of telecommunications services and to
streamline regulation of the industry. The 1996 Act provides that implementing
its legislative objectives will be the task of the FCC, the state public
utilities commissions and a federal-state joint board. The FCC released a
tentative implementation schedule on February 12, 1993 Much of this
implementation must be completed in numerous virtually simultaneous proceedings
with short, 6 to 18 month deadlines. These proceedings are expected to address
issues and proposals already before the FCC in pending rule making proceedings
affecting the wireless industry as well as additional areas of
telecommunications regulation not previously addressed by the FCC and the
states.
The primary purposes and effect of the new law is to open all
telecommunications markets to competition including the local wireline loop. The
1996 Act makes all state and local barriers to competition unlawful, whether
they are direct or indirect. It directs the FCC to hold notice and comment
proceedings and to preempt all inconsistent state and local laws and
regulations. Only narrow powers are left to state and local authorities. Each
state retains the power to impose competitively neutral requirements that are
both consistent with the 1996 Act's universal service provision and necessary
for universal service, public safety and welfare, continued service quality and
consumer rights. While a state may not impose requirements that effectively
function as barriers to entry or create a competitive disadvantage, the scope of
state authority to maintain existing or adopt new requirements under this
section is not clearly spelled out. Before it preempts a state or local
requirements as violating the entry barrier prohibition, the FCC must hold a
notice and comment proceeding.
The recently enacted Telecommunications Act contains certain provisions
that lift, or establish procedures for lifting certain restrictions relating to
RBOC's ability to engage directly in internet access business. The
Telecommunications Act also makes it easier for national long distance carriers
such as AT&T to offer local telephone service. In addition, the
Telecommunication Act allows the RBOC's to provide electronic publishing of
information and databases. Competition from these Companies could have an
adverse effect on the Company's business.
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Due to the increasing use of the internet, it is possible that additional
laws and regulations may be adopted with respect to the internet, covering
issues such as content , user privacy, pricing, libel, intellectual property
protection and infringement and technology export and other controls. Changes in
the regulatory environment relating to the internet access industry, including
regulatory changes that directly or indirectly affect telecommunications costs
or increase the likelihood or scope of competition from regional telephone
companies or others, could have a material adverse effect on us.
PROPRIETARY INFORMATION
We have developed custom designed software for use with internet access and
relies on a combination of copyright, trademark, patent and trade secrets and
contractual restrictions to establish and protect our licensed and patented
VMSK/VPSK technology.
It is our policy to execute agreements with employees and consultants upon
commencement of their relationship with us. These agreements provide that
confidential information developed or made known during the course of a
relationship with us is to be owned by the Company or its respective
subsidiaries and kept confidential and not disclosed to third parties except in
specific circumstances. There can be no assurances that the steps taken by us
will be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
EMPLOYEES
As of June 30, 2000, we employed a total of twenty-seven employees, five
of whom are in management, three in administration, six in marketing, three in
customer service, six on the technical staff, and four in our lab.
None of our employees are represented by a labor union. We have not
experienced any work stoppage and consider relations with our employees to be
good.
FACILITIES
We currently lease our office facilities on a year to year basis for $3,200
per month to provide space for administration, technical support and customer
service.
Our facilities are adequate for our current needs and suitable additional
space, when needed, will be available to accommodate expansion of our operations
on commercially reasonable terms.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of June 30, 2000, by (i) each person
including any "group" as that term is used in Section 13(d)(3) of the Securities
Act of 1934 (the "Exchange Act") who is known by us to own beneficially 5% or
more of the common stock, (ii) each director of the Company, and (iii) all
directors and executive officers as a group Unless otherwise indicated, all
persons listed below have sole voting power and investment power with respect to
such shares. The total number of shares authorized is 60,000,000 shares, each of
which is $.001 per share par value. 12,499,842 shares have been issued and are
outstanding:
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<PAGE> 24
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Owned after Offering
----------------------- --------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Robert Snyder 3,625,000 29.00% 3,625,000 23.69%
Dennis Snyder 3,800,000 30.40% 3,800,000 24.84%
Joseph Lechiara 101,500 .81% 101,500 .66%
Barry Gilliland 93,319 .75% 93,319 .60%
Total shares outstanding 12,499,842 100.00% 15,299,842 100.00%
</TABLE>
Directors and officers as a group 7,619,819 shares.
Robert Snyder and Dennis Snyder are (a) related by blood or marriage,(b)
directors and (c) officers. Barry Gilliland is a director and an officer. Joseph
Lechiara is an officer.
The adult Snyder children own an additional 600,000 founder shares.
All shares held by officers, directors and shareholders who own 5% or more
of our stock will be held in escrow pursuant to an escrow agreement required by
the Ohio Division of Securities. Those insider shares may not be sold or
transferred for at least one year and perhaps as long as four years depending on
the financial performance of the company. Such shares of insiders are allowed to
be released from escrow if the company's audited financial statements show
fully-diluted earnings, after taxes and exclusive of extraordinary items, of at
least $.60 per share (12% of our public offering price) for four consecutive
quarters. If the escrowed shares are not released under these financial
criteria, then 25% of them will be released automatically on each of the fifth
through eight anniversaries of the effective date to the registration of this
offering.
MANAGEMENT
There are currently seven (7) occupied seats on the board of directors. The
following table sets forth information with respect to the directors and
executive officers.
<TABLE>
<CAPTION>
DATE SERVICE
NAME AGE OFFICE COMMENCED
---- --- ------ ---------
<S> <C> <C> <C>
Robert Snyder* 55 Chairman, President December, 1997
& Chief Executive Officer
Joseph Lechiara* 64 Chief Financial Officer August, 1998
& Treasurer
Dennis Snyder* 45 Vice President December, 1997
Barry Gilliland* 46 Vice President December, 1997
Dr. Marion A. Ruebel* 67 Director May, 2000
J. Bruce Hunsicker* 45 Director May, 2000
Frank A. Wahl* 79 Director May, 2000
Jeffrey F. Cutruzzula 46 Chief Operating Officer December, 1999
</TABLE>
* Indicates Board Member
All directors will hold office until the next annual stockholder's meeting and
until their successors have been elected or qualified or until death,
resignation, retirement, removal, or disqualification. Vacancies on the board
will be filled by a majority vote of the remaining directors. Our officers serve
at the discretion of the board of directors. We increased the board to seven
members by adding three outside directors at the May shareholders meeting.
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<PAGE> 25
The officers and directors are set forth below.
ROBERT SNYDER, President, CEO and Chairman. Mr.Snyder, as company
co-founder, integrated the resources and technology into the platform that
supports AlphaCom's product rollout to its distributor base. Additionally, he
developed the business model that defines the Company's line of products and
services. Mr. Snyder's business background includes over 34 years of related
experience in establishing and maintaining start-up businesses involved in
manufacturing, sales and marketing, network marketing and finance. In 1964, he
established a company to sell and distribute office supplies and copy machines
that has enjoyed over 35 years of continuous operation. During his career, he
has demonstrated the ability to develop marketing plans and sales strategies
having established five additional companies. With considerable experience in
small business investment ventures, Mr. Snyder brings to AlphaCom the leadership
and financial skills he employed successfully in other businesses. He most
recently was an independent distributor for Quorum International until March of
1996 when he formed Alpha Beta Communications as the forerunner to AlphaCom,
Inc. Mr. Snyder intends to devote full time to the Company acting in an
executive capacity.
JOSEPH M. LECHIARA, Chief Financial Officer. Mr. Lechiara was an Audit
Partner in a big six accounting firm with 25 years experience. His
responsibilities included working with start-up companies to very large Fortune
500 companies in audit, tax and consulting activities. His experience includes
numerous U. S. Securities and Exchange Commissions (SEC) filings and compliance
with Federal and State Regulatory agencies over a broad spectrum of industries
including Manufacturing, life insurance, food processing, distribution, theme
parks and transportation. In 1985, Mr. Lechiara purchased American Brewed Coffee
and proceeded to grow it until he sold it to a national chain in 1993. At the
same time he formed American Spring Water (sold in 1995), American Hospitality
Coffee Service (Inn Room Coffee Service), American Music & Vending and J & P
Associates (a consulting company). During 1995, Mr. Lechiara sold all companies
except for J & P Associates. From 1995 until he joined the Company, he designed
and implemented accounting systems for various companies under the J & P
Associates banner. Mr. Lechiara intends to devote full time to the Company
acting in an executive capacity.
DENNIS SNYDER, Vice President of Technology. Mr. Snyder, company
co-founder, has 18 years experience in oversite of service and repair of high
tech electronic equipment. He became the lead troubleshooter for an electronics
firm where he performed as assistant service manager. Dennis Snyder has owned
his own software development and computer consulting businesses within his
career in the computer industry. Most recently he was an independent distributor
for Quorum International until June 1996 when he became service manager for Andy
Sprinkler Services. In December 1997, he became the co-founder of AlphaCom,
Inc.. Most recently, he has been directly involved in the sales and marketing of
high tech products and services. Mr. Snyder intends to devote full time to the
Company acting in an executive capacity.
BARRY GILLILAND, Vice President of Customer Service. Mr. Gilliland has
extensive background in office and manufacturing management. His
responsibilities included supervising over 50 employees as production foreman,
the implementation of several company-wide programs, production scheduling,
inventory control and statistical quality control. He developed and implemented
a purchasing program of new products while maintaining communications with
vendors. He established a corporate fleet and facility management program which
produced substantial savings for the corporation. Mr. Gilliland's implementation
skills are a key asset to the Company and its distributor base. From 1987 to May
1997, he was involved in corporate purchasing for Kinko's. He then became an
independent consultant before joining AlphaCom in December 1997. Mr. Gilliland
intends to devote full time to the Company acting in an executive capacity.
DR. MARION A. RUEBEL, Director. Dr. Ruebel is a Trustee Professor at The
University of Akron. He served as President of the University of Akron from
1996 to 1999. Dr. Reubel received his Ph.D in 1969 from Iowa State University;
Ames, Iowa. He brings his wide range of educational and administrative skills
to the Board.
FRANK A. WAHL, Director. Mr. Wahl, before his retirement was a high school
teacher and coach. He is a graduate of The University of Akron and is in The
University of Akron Hall of Fame, the Summit County Hall of Fame and the All
American Soap Box Derby Hall of Fame. He volunteers his time to nine charitable
groups in Akron.
J. BRUCE HUNSICKER, ESQ., Director. Mr. Hunsicker is a Shareholder in the law
firm of Brouse McDowell. He has provided legal services to the Company since
January 1999.
JEFREY F. CUTRUZZULA, Chief Operating Officer. Mr. Cutruzzula earned a degree in
biology from LaRoche College and a graduate degree in public management from
Mellon University. Since 1991, he has combined his educational and professional
experiences and applied them to the development of start-up organizations which
included Pittsburgh based Medicaid HMO where he was Vice President of
Administration and Operations. He was also engaged as a consultant for the
Armstrong Group, LLC, a leading edge business consultation firm, where he honed
his skills in organizational development, process development and management,
facilitation, and leadership counseling. He devotes full time as an officer of
the Company.
EXECUTIVE ADVISORY BOARD
We will establish an informal executive advisory board, appointed by Mr. Robert
Snyder. The role of the executive advisory board is to be available to assist
our management with general business and strategic planning advice upon request
from time-to time. Accordingly, the executive advisory board members intend to
devote themselves part-time to our affairs.
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<PAGE> 26
EXECUTIVE COMPENSATION
The following table sets forth the annual renumeration for the highest paid
officers and directors for the annual period ended December 31, 1999.
<TABLE>
<CAPTION>
Capacities in Which Aggregate
Name Remuneration was Received Remuneration
------------------------------------------------------------------------------------------
<S> <C> <C>
Robert Snyder Chairman, President and Chief $52,000
Executive Officer
Joseph Lechiara Chief Financial Officer and Treasurer $52,000
Dennis Snyder Vice President of Technology $52,000
Barry Gilliland Vice President of Customer Service $38,220
</TABLE>
EMPLOYMENT AGREEMENTS
We plan to enter into employment agreements with each of Messrs. Robert
Snyder, Dennis Snyder, Joseph Lechiara and Barry Gilliland which provide for an
annual base compensation of $52,000, $52,000, $52,000 and $38,220, respectively,
and such bonuses as the board of directors may from time to time determine.
STOCK OPTIONS
We have not adopted any formal stock option plans to reward and provide
incentives to our officers, directors, employees, consultants and other eligible
participants, but is anticipated we will do so as follows: an executive stock
incentive plan, an incentive stock option plan, and a stock incentive plan. The
board set aside 250,000 shares for issuance under these plans, if and when
adopted. Awards under each plan may be in the form of incentive stock options or
non-qualified stock options. We will not grant non-qualified stock options with
an exercise price of less than 85% of the fair market value of our common stock
on the date of grant of the relevant option. The plans will be administered by
our board of directors, which is authorized to select the plan recipients, the
time or times at which awards may be granted and the number of shares to be
subject to each option awarded.
OTHER TRANSACTIONS
All transactions between our company and its officers, directors and 5% or
more shareholders will be on terms no less favorable to the Company than that
which could be obtained from independent third parties.
DIRECTORS' COMPENSATION
Our directors receive no compensation for their services as directors.
Members of the executive advisory board will receive payment for their services,
travel and other expenses incurred in connection with attendance at each
meeting.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
At present we have not entered into individual indemnity agreements with
our officers or directors. However, our by-laws contain a provision which
requires us to indemnify any director or officer, or former
24
<PAGE> 27
director or officer against actual expenses incurred in defending any legal
action where they are a party by reason of being or having been a director or
officer. However, we are not require to indemnify any such person who is found
to be liable for negligence or misconduct in their performance of their duty.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person 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, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and we will be governed by the final adjudication of
such case.
DIRECTORS AND OFFICERS INSURANCE
In May, 2000, we obtained directors and officers liability insurance.
KEYMAN LIFE INSURANCE
Life insurance on key personnel is expected to be purchased after the
effective date of this offering from offering proceeds, in amounts up to $1
million, 50% payable to the Company and 50% payable to family beneficiaries. We
are planning to purchase such insurance to provide us with the capital to
replace the executive loss (executive search for successor, etc.). The costs of
such insurance is not expected to be material.
CERTAIN TRANSACTIONS
On December 5, 1997, the Board of Directors authorized the issuance of an
aggregate 8,025,000 shares as founder's stock at a price of $.001 per share, to
Messrs. Robert Snyder and Dennis Snyder and their adult children.
On January 30, 1998, the Board authorized the issuance of an aggregate of
1,272,000 shares as founder's stock to its employees, and advisors to the
Company at a price of $.001 per share, to approximately 26 individuals.
Subsequently, on September 30, 1998, 33,000 shares were issued to employees at a
price of $.18 per share.
As of July 2, 1998, we issued 1,653,354 restricted shares of our common
stock to 47 minority shareholders of Alpha Beta Communications, Inc. (ABC).
Under Rule 144 of the Securities and Exchange Act of 1934 those shares must be
held for a minimum of one year after issuance before trading provided our stock
is listed for trading. We further agreed to make a $200,000 cash payment to
ABC's majority shareholder, Robert Snyder, the Chairman, President and Chief
Executive Officer of AlphaCom, Inc. The $200,000 payment is only to be paid upon
AlphaCom completing a successful public offering of our common stock. We are not
liable for any other creditor, consumer, entity or payables not listed prior to
June 1, 1998.
25
<PAGE> 28
In July 1998, we offered 750,000 units, consisting of one share of our
common stock and a promissory note equal to $1.00, at $1.00 under Regulation D,
Rule 504. We successfully closed this offering September 30, 1998.
In the fall of 1998, approximately 970,000 shares of founders' stock were
privately sold to some of our distributors. These shares were not sold pursuant
to an effective registration statement, and may have been sold without an
available exemption from the registration requirements of the applicable federal
or state securities laws. As a result, we believed that the distributors who
received those shares had a right to ask for a refund of their purchase price or
to receive duly registered shares in exchange for their shares. We began the
process of offering to rescind those transactions in the summer of 1999,
offering the distributors either cash or a commitment to exchange their shares
as soon as feasible. Up to 900,000 shares are being registered in this offering
for that purpose. We believe that we have, or will through the completion of
this rescission offer, satisfied our securities law obligations to these
distributors.
In November 1998, the board of directors authorized the issuance of 124,000
shares, plus incentives, in connection with a consulting contract for services
rendered. The board also reserved 500,000 shares to fund warrants to be issued
in connection with a proposed loan of $2,500,000. Warrant holders will be
entitled to purchase common stock at $1.00 a share after holding the warrants
for one year. The actual loan was for $160,000 with 32,000 warrants.
We subsequently sold a private placement offering at $1.00 per share, under
Regulation D, Rule 506, dated October 8, 1998, to twenty investors in the amount
of $250,000.
On April 19,1999, the board of directors set aside 300,000 additional
shares at $1.00 a share to be issued to employees in lieu of cash bonus, of
which 83,000 shares have been issued as of February 29, 2000. In addition, the
board of directors authorized the issuance of 80,000 shares to the Chief
Financial Officer at $1.00 a share.
On November 23, 1999, we entered into a stock purchase contract and issued
20,000 shares at a purchase price of $5.00 per share. In addition, options to
purchase up to 980,000 shares at $5.00 per share were granted. However, these
options are tied to a performance clause and must be exercised on or before
November 22, 2000.
We also issued warrants which would allow the holders thereof to purchase
up to 300,000 shares of our common stock at the offering price per share
included in the proposed offering which may be exercised, at the warrant holders
option, within a one week time frame after we receive approval from the
Securities and Exchange Commission on our offering.
In December 1999, we entered into a one year consulting contract with a New
York firm for financial services. Compensation included the issuance in April,
2000, of 200,000 shares of stock at $5.00 per share.
DESCRIPTION OF SECURITIES
All material provisions of our capital stock are summarized in this
prospectus. However the following description is not complete and is subject to
applicable Nevada law and to the provisions of our articles of incorporation and
by-laws. We have filed copies of these documents as exhibits to the registration
statement related to this prospectus.
COMMON STOCK
We are authorized to issue 60,000,000 shares, at a par value of $.001 per
share. As of the date of this prospectus, there are 12,499,842 shares
outstanding. After giving effect to the offering, the issued and outstanding
capital stock of the Company will consist of 15,299,842 shares.
YOU HAVE THE VOTING RIGHTS FOR YOUR SHARES. You and all other holders of
common stock are entitled to one vote for each share held of record on matters
to be voted on by stockholders. You have no cumulative
26
<PAGE> 29
voting rights with respect to the election of directors, with the result that
the holders of more than 50% of the shares voting for the election of directors
can elect all of the directors then up for election.
YOU HAVE DIVIDEND RIGHTS FOR YOUR SHARES. You and all other holders of
common stock are entitled to receive dividends and other distributions when, as
and if declared by the board of directors out of funds legally available, based
upon the percentage of our common stock you own. We will not pay dividends. You
should not expect to receive any dividends on shares in the near future. This
investment may be inappropriate for you if you need dividend income from an
investment in shares.
YOU HAVE RIGHTS IF WE ARE LIQUIDATED.
Upon our liquidation, dissolution or winding up of affairs, you and all
other holders of our common stock will be entitled to share in the distribution
of all assets remaining after payment of all debts, liabilities and expenses,
and after provision has been made for each class of stock, if any, having
preference over our common stock. Holders of common stock, as such, have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to the common stock. All of the outstanding common stock
is, and the common stock offered hereby, when issued in exchange for the
consideration paid as set forth in this prospectus, will be, fully paid and
non-assessable. Our directors, at their discretion, may borrow funds without
your approval, which potentially further reduces the liquidation value of your
shares.
YOU HAVE NO RIGHT TO ACQUIRE SHARES OF STOCK BASED UPON THE PERCENTAGE OF
OUR COMMON STOCK YOU OWN WHEN WE SELL MORE SHARES OF OUR STOCK TO OTHER PEOPLE.
This is because we do not provide our stockholders with preemptive rights to
subscribe for or to purchase any additional shares offered by us in the future.
The absence of these rights could, upon our sale of additional shares, result in
a dilution of the percentage ownership that you own.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 15,299,842 shares issued and
outstanding assuming all the shares offered herein are sold. The common stock
sold in this offering will be freely transferable without restrictions or
further registration under the Securities Act, except for any of our shares
purchased by an "affiliate" (as that term is defined under the Act) who will be
subject to the resale limitations of Rule 144 promulgated under the Act.
There will be approximately 12,499,842 shares outstanding that are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act.
The common stock owned by insiders, officers and directors are deemed
"restricted securities" as that term is defined under the Securities Act and in
the future may be sold under Rule 144, which provides, in essence, that a person
holding restricted securities for a period of one (1) year may sell every three
(3) months, in brokerage transactions and/or market maker transactions, an
amount equal to the greater of (a) one percent (1%) of our issued and
outstanding common stock or (b) the average weekly trading volume of the common
stock during the four (4) calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of common stock without any
quantity limitation by a person who is not an affiliate of the Company and who
has satisfied a two (2) year holding period. Additionally. Common stock
underlying employee stock options granted, to the extent vested and exercised,
may be resold beginning on the ninety-first day after the Effective Date of a
Prospectus, or Offering Memorandum pursuant to Rule 701 promulgated under the
Securities Act.
As of the date hereof and upon completion of the offering, none of our
common stock (other than those which are qualified by the Securities and
Exchange Commission in connection with this offering) are available for sale
under Rule 144. Future sales under Rule 144 may have an adverse effect on the
market price of the common stock. Our officers, directors and certain of our
security holders have agreed not to
27
<PAGE> 30
sell, transfer or otherwise dispose of their common stock or any securities
convertible into common stock for a period of 12 months from the date hereof.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such common stock after the 90th day following the date of this Prospectus
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90 day
period, but without a holding period.
There has been no public market for our common stock. With a relatively
minimal public float and without a professional underwriter, there is little or
no likelihood that an active and public trading market, as that term is commonly
understood, will develop, or if developed that it will be sustained, and
accordingly, an investment in our common stock should be considered highly
illiquid. Although we believe a public market will be established in the future,
there can be no assurances that a public market for our common stock will
develop. If a public market for the common stock does develop at a future time,
sales by shareholders of substantial amounts of our common stock in the public
market could adversely affect the prevailing market price and could impair our
future ability to raise capital through the sale of our equity securities.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 relating to the common stock offered hereby. This
prospectus, which is a part of the registration statement, does not contain all
of the information included in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to us, the common stock
offered hereby, reference is made to the registration statement, including the
exhibits and schedules thereto. Statements contained in this Prospectus
concerning the provisions or contents of any contract, agreement or any other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement or document filed as an exhibit to the registration
statement, reference is made to such exhibit for a more complete description of
the matters involved.
The registration Statement, including the exhibits and schedules thereto,
may be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
DC 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. The Commission also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the Company.
The address of such site is http://www.sec.gov.
We intend to furnish to our shareholders annual reports containing audited
consolidated financial statements certified by independent public accountants
for each fiscal year and quarterly reports containing unaudited consolidated
financial statements for the first three quarters of each fiscal year.
We will provide without charge to each person who receives a Prospectus,
upon written or oral request of such person, a copy of any of the information
that was incorporated by reference in the Prospectus (not including Exhibits to
the information that is incorporated by reference unless the Exhibits are
themselves specifically incorporated by reference). Any such request shall be
directed to the Chief Financial Officer of AlphaCom, Inc., Joseph M. Lechiara,
at 1035 Rosemary Boulevard, Akron, Ohio 44306, Tel. # (330) 785- 5555.
Within five days of our receipt of a subscription agreement accompanied by
a check for the purchase price, we will send by first class mail a written
confirmation to notify the subscriber of the extent, if any, to which such
subscription has been accepted. We reserve the right to reject orders for the
purchase of shares in whole or in part. Upon acceptance of each subscriber, we
will promptly provide our stock transfer agent the information to issue shares.
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<PAGE> 31
You can also call or write us at any time with questions you may have. We
would be pleased to speak with you about any aspect of this offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that reflect our views
about future events and financial performance. Our actual results, performance
or achievements could differ materially from those expressed or implied in these
forward-looking statements for various reasons, including those in the "risk
factors" section of this prospectus. Therefore, you should not place undue
reliance upon these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and
anticipate that all future earnings will be retained for development of our
business. The payment of any future dividends will be at the discretion of our
board of directors and will depend upon, among other things, future earnings,
capital requirements, the financial condition of the company and general
business conditions.
STOCK TRANSFER AGENT
Our transfer agent and registrar of the common stock is American Stock
Transfer & Trust Company, 40 Wall street, New York, New York 10004.
EXPERTS
The consolidated combined financial statements of AlphaCom, Inc. and
Subsidiary and Affiliate (development stage companies) as of and for the years
ended December 31, 1999 and 1998 have been audited by Spector & Saulino, CPA's,
L.L.C., independent auditors, as set forth in their report thereon included
herein and incorporated herein by reference. Such consolidated combined
financial statements have been included in reliance upon such report given upon
their authority as experts in accounting and auditing.
LEGAL MATTERS
There is no past, pending or, to our knowledge, threatened litigation or
administrative action which has or is expected by our management to have a
material effect upon our business, financial condition or operations, including
any litigation or action involving our officers, directors, or other key
personnel. However, Robert Snyder, our president has a federal tax lien filed
against him which could cause his assets to be seized by the IRS, including his
AlphaCom stock, if a payment arrangement is not agreed upon and complied with.
The Law Offices of Miles Garnett, Esq., 66 Wayne Avenue, Atlantic Beach,
N.Y. 11509, Tel. # (516) 371-4598, will pass upon certain legal matters relating
to the Offering.
There is no underwriter for this offering, therefore, offerees will not
have the benefit of an underwriter's due diligence efforts which would typically
include the underwriter to be involvede in the preparation of disclosure and the
pricing of the common stock offered hereby among other matters. As we have never
engaged in the public sale of our common stock, we have no experience in the
underwriting of any such
29
<PAGE> 32
offering. Accordingly, there is no prior experience from which investors may
judge our ability to consummate this offering. In addition, the common stock is
being offered on a "best efforts" basis. Accordingly, there can be no assurances
as to the number of shares that may be sold or the amount of capital that may be
raised pursuant to this offering.
30
<PAGE> 33
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(DEVELOPMENT STAGE COMPANIES)
INDEX TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Combined Balance Sheets - Unaudited
As of June 30, 2000 and 1999 ...............................................................F-2
Consolidated Combined Statements of Operations - Unaudited
For the six months ended June 30, 2000 and 1999
And for the period from inception through June 30, 2000.....................................F-4
Consolidated Combined Statements of Changes in Stockholders' Deficit - Unaudited
For the six months ended June 30, 2000 and 1999.............................................F-5
Consolidated Combined Statements of Cash Flows - Unaudited
For the six months ended June 30, 2000 and 1999
And for the period from inception through June 30, 2000.....................................F-6
Notes to Consolidated Combined Financial Statements - Unaudited
As of and for the six months ended June 30, 2000 and 1999...................................F-8
Report of Independent Certified Public Accountant..........................................F-17
Consolidated Combined Balance Sheets
As of December 31, 1999 and 1998...........................................................F-18
Consolidated Combined Statements of Operations
For the years ended December 31, 1999 and 1998
And for the period from inception through December 31, 1999................................F-20
Consolidated Combined Statements of Changes in Stockholders' Deficit
For the years ended December 31, 1999 and 1998............................................ F-21
Consolidated Combined Statements of Cash Flows
For the years ended December 31, 1999 and 1998
And for the period from inception through December 31, 1999................................F-22
Notes to Consolidated Combined Financial Statements
As of and for the years ended December 31, 1999 and 1998...................................F-24
</TABLE>
<PAGE> 34
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED BALANCE SHEETS - UNAUDITED
June 30, 2000 and 1999
-----
<TABLE>
<CAPTION>
ASSETS
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 3,207 $ 7,833
Accounts receivable:
Trade 52,933 5,434
Other 58,739 12,943
Less: allowance for bad debts (5,001) (5,001)
----------- -----------
106,671 13,376
Inventories 50,190 42,452
Prepaid expenses and other current assets 782,235 329,927
Note receivable 500,000 --
----------- -----------
Total current assets 1,442,303 393,588
----------- -----------
Property and equipment:
Machinery and equipment 222,363 68,039
Furniture and fixtures 44,406 38,132
Vehicles 56,725 54,539
Website in progress 119,416 --
Leasehold improvements 34,580 34,580
----------- -----------
477,490 195,290
Less accumulated depreciation
and amortization 97,409 37,889
----------- -----------
Total property and equipment 380,081 157,401
----------- -----------
Other assets:
Patent rights 205,000 205,000
Advance on investment 7,500 --
Deferred registration costs 75,048 --
Deposits 5,579 13,340
----------- -----------
Total other assets 293,127 218,340
----------- -----------
Total assets $ 2,115,511 $ 769,329
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-2
<PAGE> 35
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED BALANCE SHEETS, Continued - UNAUDITED
June 30, 2000 and 1999
-----
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Current liabilities:
Notes payable, related party $ 663,306 $ 721,306
Notes payable, others 2,944,040 1,314,885
Current portion of long-term debt 169,741 58,939
Accounts payable, trade 636,717 795,239
Accrued interest, related party 10,090 34,363
Accrued interest, others 249,662 52,931
Accrued expenses 384,623 103,315
Deferred compensation 136,918 132,420
Deferred revenue 108,500 --
----------- -----------
Total current liabilities 5,303,597 3,213,398
----------- -----------
Long-term liabilities:
Deferred revenue 990,059 --
Long-term debt, net of current portion 11,462 21,056
----------- -----------
Total long-term liabilities 1,001,521 21,056
----------- -----------
Total liabilities 6,305,118 3,234,454
----------- -----------
Stockholders' deficit:
Common stock (Note 7) 267,049 266,748
Additional paid-in capital 1,747,621 567,122
Treasury stock (1,653) (1,653)
Deficit accumulated during the development
stage (6,202,624) (3,297,342)
----------- -----------
Total stockholders' deficit (4,189,607) (2,465,125)
----------- -----------
Total liabilities and stockholders' deficit $ 2,115,511 $ 769,329
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE> 36
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS - UNAUDITED
for the six months ended June 30, 2000 and 1999
and for the period from inception through June 30, 2000
-----
<TABLE>
<CAPTION>
Cumulative
From Inception
April 19, 1996 to
June 30, 2000 2000 1999
----------------- ---- ----
<S> <C> <C> <C>
Net sales, communication equipment $ 424,837 $ 55,097 $ 50,283
Cost of sales, communication equipment 149,452 2,715 33,497
---------------- ---------------- -----------------
Gross profit, equipment 275,385 52,382 16,786
---------------- ---------------- -----------------
Net sales, communication services 332,577 176,507 24,869
Cost of sales, communication services 233,114 189,403 26,547
---------------- ---------------- -----------------
Gross profit, services 99,463 (12,896) (1,678)
----------------- ---------------- -----------------
Total gross profit 374,848 39,486 15,108
Selling, general and administrative
expenses 5,993,479 1,660,043 877,782
---------------- ---------------- -----------------
Loss from operations (5,618,631) (1,620,557) (862,674)
---------------- ---------------- -----------------
Other expense:
Other 9,276 - -
Interest expense (593,269) (180,652) (89,874)
---------------- ---------------- -----------------
Total other expense (583,993) (180,652) (89,874)
---------------- ---------------- -----------------
Net loss $ (6,202,624) $ (1,801,209) $ (952,548)
================ ================= =================
Net loss per common share $ (0.59) $ (0.15) $ (0.08)
================ ================= ==================
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE> 37
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT - UNAUDITED
for the six months ended June 30, 2000 and 1999
-----
<TABLE>
<CAPTION>
Common Deficit
Stock Par Value Accumulated
Date Issued of Additional Treasury During the Total
of and Common Paid-in Stock Development Stockholders'
Transaction Outstanding Stock Capital (Note 7) Stage Deficit
----------- ----------- --------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,1998 11,984,042 $ 266,533 $ 393,752 $ (1,653) $ (2,344,794) $ (1,686,162)
Stock issuance costs 3/31/99 - - (41,415) - - (41,415)
Stock issued to key
employees ($1.00
per share) 4/19/99 156,000 156 155,844 - - 156,000
Stock issued in
connection with
consulting services
($1.00 per share) 6/1/99 59,000 59 58,941 - - 59,000
Net loss - - - - (952,548) (952,548)
---------- ---------- ---------- --------- ------------ ------------
Balances at
June 30, 1999 12,199,042 $ 266,748 $ 567,122 $ (1,653) $ (3,297,342) $ (2,465,125)
========== ========== ========== ========= ============ ============
Balances at
December 31, 1999 12,299,842 $ 266,849 $ 747,821 $ (1,653) $ (4,401,415) $ (3,388,398)
Stock issued in
connection with
consulting services
($5.00 per share) 4/24/00 200,000 200 999,800 - - 1,000,000
Net loss - - - - (1,801,209) (1,801,209)
---------- ---------- ---------- --------- ------------ ------------
Balances at
June 30, 2000 12,499,842 $ 267,049 $1,747,621 $ (1,653) $ (6,202,624) $ (4,189,607)
========== ========== ========== ========= ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE> 38
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENTS OF CASH FLOWS - UNAUDITED
for the six months ended June 30, 2000 and 1999
and for the period from inception through June 30, 2000
Increase (Decrease) in Cash
-----
<TABLE>
<CAPTION>
Cumulative
From Inception
April 19, 1996 to
June 30, 2000 2000 1999
------------- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,202,624) $ (1,801,209) $ (952,548)
-------------- -------------- ---------------
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 773,909 531,203 55,037
Stock issued to key employees for
compensation 170,212 - 156,000
Stock issued in connection with
consulting services 132,800 - 59,000
License fee income (44,041) (44,041) -
(Increase) decrease in assets:
Accounts receivable, trade (52,933) (50,379) 10,025
Accounts receivable, employees - - 5,710
Accounts receivable, other (58,739) (37,350) (5,403)
Allowance for bad debts 5,001 - (2,000)
Inventories (50,190) (28,973) (21,817)
Prepaid expenses and other current assets (323,735) 43 (61,422)
Deferred registration costs (75,048) - -
Deposits (5,579) - -
Increase (decrease) in liabilities:
Accounts payable, trade 636,717 (142,559) 104,699
Accrued interest, related party 10,090 (43,468) 18,181
Accrued interest, others 249,662 119,938 16,474
Accrued expenses 343,208 23,601 5,252
Deferred compensation 136,918 (8,763) 31,120
Deferred revenue 642,600 642,600 -
-------------- -------------- ---------------
Total adjustments 2,490,852 961,852 370,856
-------------- -------------- ---------------
Net cash used in operating activities (3,711,772) (839,357) (581,692)
-------------- -------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (477,490) (99,834) (29,249)
Purchase of patent rights (205,000) - -
Advance on investment (7,500) - -
-------------- -------------- ---------------
Net cash used in investing activities (689,990) (99,834) (29,249)
-------------- -------------- ---------------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE> 39
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENTS OF CASH FLOWS, Continued - UNAUDITED
for the six months ended June 30, 2000 and 1999
and for the period from inception through June 30, 2000
Increase (Decrease) in Cash
-----
<TABLE>
<CAPTION>
Cumulative
From Inception
April 19, 1996 to
June 30, 2000 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt 203,924 - 50,000
Repayment of long-term debt (22,721) (4,587) (4,443)
Proceeds from notes payable, related party 721,306 - -
Repayment of notes payable, related party (58,000) (3,000) -
Proceeds from notes payable, others 3,070,000 1,025,000 606,900
Repayment of notes payable, others (260,960) (116,460) (42,015)
Proceeds from the sale of stock 751,420 - -
----------- ----------- -----------
Net cash provided by financing
activities 4,404,969 900,953 610,442
----------- ----------- -----------
Net increase (decrease) in cash 3,207 (38,238) (499)
Cash, beginning of period - 41,445 8,332
----------- ----------- -----------
Cash, end of period $ 3,207 $ 3,207 $ 7,833
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for
interest $ 234,737 $ 104,182 $ 55,219
=========== =========== ===========
</TABLE>
Supplemental disclosures of non-cash
investing and financing activities:
During 1999, AlphaCom issued 59,000 shares of stock in connection with a
consulting agreement (Note 13).
AlphaCom issued 156,000 shares of stock to certain key employees for
compensation during 1999.
During 1999, AlphaCom accrued certain stock issuance costs totaling
$41,415.
During 2000, AlphaCom issued 200,000 shares of stock in connection with a
consulting agreement (Note 3).
During 2000, AlphaCom recorded a note receivable totaling $500,000 as
partial payment for an initial license fee.
The accompanying notes are an integral
part of these financial statements.
F-7
<PAGE> 40
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS - UNAUDITED
-----
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
AlphaCom, Inc. ("AlphaCom") was incorporated on December 1, 1997 under the
laws of the State of Nevada and commenced operations on January 1, 1998.
AlphaCom will distribute high-technology communication products and
services to consumers who utilize the internet. Sales and distribution will
be accomplished through a network marketing system in North America and
through authorized distributors and licensees in countries outside of North
America.
The following is a summary of significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated combined financial statements include the
accounts of AlphaCom and its wholly-owned subsidiary (AlphaCom Canada,
Ltd.) together with Alpha Beta Communication, Inc., a company affiliated
through common management and ownership (the "Company"). All significant
intercompany profits, balances, and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION
The Company's account balances that are in Canadian currency (which result
from the Canadian subsidiary) have been translated in accordance with SFAS
No. 52, "Foreign Currency Translation." Assets and liabilities have been
translated at exchange rates as of the end of the year. Income and expense
accounts have been translated at the average exchange rates during the
year. Due to limited activity at the Canadian subsidiary, there were no
transaction gains and losses from remeasurement of monetary assets,
liabilities, income and expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held
for trading purposes. The Company estimates that the fair value of all
financial instruments at June 30, 2000 and 1999 does not differ materially
from the aggregate carrying values of its financial instruments recorded in
the accompanying balance sheets. The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair
value, and, accordingly, the estimates are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
LICENSE FEES
Revenue from sales of licenses will be recognized on a straight-line basis
over the ten year license period. AlphaCom is responsible for the protec-
tion of the patent rights for the licensee during the license period.
INVENTORIES
Inventories consist primarily of computer communication hardware and
software and are stated at lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Major additions and betterments
are charged to the property accounts while replacements, maintenance and
repairs which do not improve or extend the life of the respective assets
are expensed currently. When property is retired or otherwise disposed of,
the cost of the property is removed from the asset account, accumulated
depreciation is charged with an amount equivalent to the depreciation
provided, and the difference is charged or credited to income.
F-8
<PAGE> 41
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
-------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(Continued)
DEPRECIATION
Depreciation is provided using primarily the straight-line method over the
estimated useful lives of the assets for financial statement purposes;
accelerated methods are primarily used for tax purposes.
PATENT RIGHTS
Patent rights will be amortized over the shorter of the period benefited
from the sale of the technology or the remaining life of the patent. No
amortization has been recorded as sales of the technology have not
commenced.
INCOME TAXES
Income taxes are provided for the tax effect of transactions reported in
the consolidated combined financial statements and consist of taxes
currently due plus deferred taxes related primarily to net operating loss
carryforwards and differences between the basis of property and equipment
and various reserves and accruals for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled (Note
9).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable.
The Company grants credit to its customers. The Company performs ongoing
credit evaluations of its customers and does not require collateral.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates inherent in the
financial statements include allowance for bad debts, depreciation and
amortization of property, plant and equipment, intangible assets and
deferred costs. Actual results could differ from those estimates.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution
that could occur if the dilutive agreement resulted in the issuance of
common stock that then shared in the earnings of the Company.
At June 30, 2000, 32,000 shares of potential common stock related to
detachable warrants on a secured loan agreement (Note 6) were excluded from
the computation of diluted loss per share because their inclusion would
have an antidilutive effect on loss per share.
F-9
<PAGE> 42
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
-------
2. LIMITED ASSET PURCHASE:
In July of 1998, AlphaCom entered into a Limited Asset Purchase Agreement
(Agreement) with Alpha Beta Communications, Inc. ("ABC"). An officer
stockholder of AlphaCom owned 92% of ABC at the time of the Agreement. The
Agreement provided for the purchase of substantially all of the assets and
assumption of certain liabilities of ABC in exchange for $475,767 due
AlphaCom from ABC and the issuance of 1,653,354 shares of $.001 par value
common stock, issued to the minority stockholders of ABC. The tangible
assets acquired included accounts receivable, inventories, property and
equipment, prepaid and other assets. Management estimated the fair market
value of these assets to be $208,950. In addition, AlphaCom acquired
intangible assets including trade names, client list, distributor base
and/or subscribers. As part of the transaction, AlphaCom also assumed
liabilities of $37,507. In addition, AlphaCom has a commitment to pay
$200,000 to ABC's majority stockholder, who is also a stockholder in
AlphaCom, contingent upon a successful public offering of AlphaCom.
The transaction, between entities under common control, has been recorded
utilizing historical costs for recorded asset and liability accounts and
par value for common stock issued. No value has been assigned to intangible
assets acquired.
AlphaCom exchanged 1,653,354 shares of its common stock for net assets of
ABC. The issuance of AlphaCom's shares has been recorded at par value
($.001 per share). ABC exchanged AlphaCom's stock for the minority shares
outstanding (totaling 62 shares) of ABC. The minority shares are held as
treasury stock of ABC and valued at par value of AlphaCom's shares.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
-----------------------------------------
Prepaid expenses and other current assets consist of the following at
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Prepaid royalties $ 320,000 $ 320,000
Deferred consulting expense 458,500 -
Prepaid rent and expenses 3,735 9,927
------------- -------------
$ 782,235 $ 329,927
============= =============
</TABLE>
The Company prepaid royalties due on sales of software made available
through a development firm. These royalties will be amortized, on a per
unit basis, as sales of software commence. According to the agreement with
the licensor, the prepaid royalty can only be used to offset future
royalties, no portion of the prepaid amount can be refunded to AlphaCom.
In December of 1999, AlphaCom entered into a consulting agreement with an
entity to provide financial advice and other services for an initial term
of twelve months. In connection with the agreement, the Company issued
200,000 shares of common stock in April 2000 as a nonrefundable consulting
fee.
The nonrefundable fee has been shown as a prepaid expense, net of
amortization at June 30, 2000. The prepaid fee is being amortized on a
monthly basis over one year commencing December 15, 1999.
Additionally, the agreement provides for certain advisory fees and a
success fee based upon a percentage of capital and/or other consideration
provided through the efforts of the entity.
F-10
<PAGE> 43
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
-------
4. NOTES PAYABLE, RELATED PARTY:
AlphaCom has notes payable to an officer-stockholder amounting to $663,306
and $721,306 at June 30, 2000 and 1999. The notes bear interest at rates
ranging from 5.1% to 5.6%, are unsecured and are payable at the completion
of AlphaCom's planned SB-2 offering. The weighted average of the interest
rates is 5.54% and the estimated fair value of these notes equals their
book value at June 30, 2000.
Accrued interest on notes payable, officer-stockholder amounted to $10,090
and $34,363 at June 30, 2000 and 1999, respectively.
5. NOTES PAYABLE, OTHERS:
Notes payable, others consist of two components notes payable, bridge loan
and notes payable, others. The details of these components are as follows:
In 1998 AlphaCom entered into bridge loan financing with a number of
individual creditors and issued unsecured notes payable. The notes
payable, bridge loan aggregate $559,040 and $747,985 at June 30, 2000 and
1999, respectively. The terms of the notes include interest at a stated
rate of 12% per annum together with one share of AlphaCom's $.001 par
value common stock for each one dollar borrowed. For purposes of this
transaction, management valued the common stock at $.18 per share at the
time of the stock issuance. The notes are due after completion of
AlphaCom's planned SB-2 offering.
The aggregate discount on the notes payable, bridge loan was determined by
management to be approximately $135,000 and was amortized over the
estimated life of the notes. The discount was fully amortized as of
June 30, 2000 and 1999. The estimated fair value of these notes equals
their book value.
Notes payable, others in the amount of $2,385,000 and $556,900 at June 30,
2000 and 1999, respectively, consists of notes and advances payable to
individuals bearing interest at 12% to 14%. The notes and advances
are unsecured.
Certain notes and advances payable contain warrants that allow the holders
an option to convert all or any part of the note into 341,800 shares of
AlphaCom at the estimated $5.00 offering price per share within five
business days of the effective date of the planned SB-2 offering.
6. LONG-TERM DEBT:
Long-term debt consists of the following at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Senior secured loan agreement bearing interest at 12%.
The note matures July 31, 2000 at which time
a balloon payment for the entire principal is due. $ 160,000 $ 50,000
Note payable, bank, due in monthly installments
of $453, including interest at 8.39%. The note
payable is collateralized by a vehicle and matures
July 2002. 10,366 14,735
</TABLE>
F-11
<PAGE> 44
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
------
6. LONG-TERM DEBT: (Continued)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Note payable, bank, due in monthly installments of $468,
including interest at 10.17%. The note payable is
collateralized by a vehicle and matures July 2002. 10,837 15,260
-------------- -------------
181,203 79,995
Less current maturities 169,741 58,939
-------------- -------------
$ 11,462 $ 21,056
============== =============
</TABLE>
On March 26, 1999 AlphaCom entered into a senior secured loan agreement
with a lender. Under the terms of the agreement, the lender was to use its
best efforts to loan $2,500,000 to AlphaCom from the sale of participation
interests to investors. The lender required the pledge of all of the assets
of AlphaCom as security for the loan. The loan agreement provided for
detached warrants to the lender for the purchase of up to 500,000 shares of
AlphaCom's common stock, at $1.00 per share, limited to 20% of the dollar
amount loaned to the Company. The warrants cannot be exercised until one
year from the date of the loan and expire after five years from the date of
the loan. The agreement expired July 15, 1999.
At June 30, 2000, under the terms of the agreement, the lender has a
warrant for 32,000 shares of the common stock of AlphaCom.
The book value of these notes equals their estimated fair market value at
June 30, 2000. The following is a schedule of maturities for the next
three years ending June 30 and in the aggregate for long-term debt owed
by AlphaCom at June 30, 2000:
2001 $ 169,741
2002 11,462
---------------
$ 181,203
===============
7. STOCKHOLDERS' DEFICIT:
The consolidated combined stockholders deficit at June 30, 2000 and
1999 are composed of:
<TABLE>
<CAPTION>
Number of
Common
Shares Par value Additional
June 30, Issued and of common Paid-in Treasury Accumulated
2000 Outstanding Stock Capital Stock Deficit Total
---- ----------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
AlphaCom, Inc.
and subsidiary 12,499,154 $ 12,499 $1,743,807 $ - $ (5,277,650) $ (3,521,344)
Alpha Beta
Communica-
tions, Inc. 688 254,550 3,814 (1,653) (924,974) (668,263)
----------- ---------- ------------ --------- ------------ ------------
12,499,842 $ 267,049 $1,747,621 $ (1,653) $ (6,202,624) $ (4,189,607)
=========== ========== ========== ========= ============ ============
</TABLE>
F-12
<PAGE> 45
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
------
7. STOCKHOLDERS' DEFICIT: (Continued)
<TABLE>
<CAPTION>
Number of
Common
Shares Par value Additional
June 30 Issued and of common Paid-in Treasury Accumulated
1999 Outstanding Stock Capital Stock Deficit Total
---- ----------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
AlphaCom, Inc.
and subsidiary 12,198,354 $ 12,198 $ 563,308 $ - $ (2,372,368) $ (1,796,862)
Alpha Beta
Communica-
tions, Inc. 688 254,550 3,814 (1,653) (924,974) (668,263)
----------- ---------- ---------- --------- ------------ ------------
12,199,042 $ 266,748 $ 567,122 $ (1,653) $ (3,297,342) $ (2,465,125)
=========== ========== ========== ========= ============ ============
</TABLE>
As disclosed in Note 16, AlphaCom has authorized common shares of
60,000,000. Alpha Beta Communications, Inc. has authorized common shares
of 750.
Treasury shares at June 30, 2000 and 1999 consist of 62 shares of Alpha
Beta Communications, Inc. acquired in connection with the Limited Asset
Purchase described in Note 2.
8. OPERATING LEASE COMMITMENTS:
AlphaCom is obligated under non-cancelable leases for the use of the
operating facility, an automobile and a copier. The leases expire at
various dates through 2001 and the facility lease allows for one one-year
renewal beginning in December 2000. Certain of the leases require the
lessee to bear the cost of insurance and maintenance.
Approximate future minimum obligations under non-cancelable lease
commitments for years ending June 30 are as follows:
2001 $ 4,508
Rent expense was approximately $43,300 and $30,900 in 2000 and 1999,
respectively.
9. INCOME TAXES:
------------
The following reconciles income taxes (benefit) reported in the
consolidated combined financial statements to taxes that would be obtained
by applying the U.S. federal statutory rate to loss before income taxes
(benefit) at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Expected benefit using statutory rate of 34% $(612,411) $(323,866)
Non-deductible expenses 3,156 1,169
State income tax benefit (104,082) (49,687)
Deductible expenses (13,163) (5,116)
Increase in valuation allowance 726,500 377,500
--------- ---------
Benefit of income taxes $ -- $ --
========= =========
</TABLE>
F-13
<PAGE> 46
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
9. INCOME TAXES: (Continued)
------------
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
The deferred tax assets consist of the following components:
Deferred federal short-term tax asset $ 232,000 $ 1,500
Deferred state short-term tax asset 41,000 500
Valuation allowance (273,000) (2,000)
----------- -----------
Total deferred short-term tax asset $ -- $ --
=========== ===========
Deferred federal long-term tax asset $ 1,786,000 $ 1,020,500
Deferred state long-term tax asset 315,000 173,000
Deferred federal long-term tax liability (11,500) (5,000)
Deferred state long-term tax liability (2,000) (1,000)
Valuation allowance (2,087,500) (1,187,500)
----------- -----------
Total deferred long-term tax asset $ -- $ --
=========== ===========
</TABLE>
Federal and state deferred tax assets related to net operating loss
carryforwards are approximately $1,786,000 and $315,000, respectively. The
federal net operating loss may be carried forward for twenty years while
the state net operating loss may be carried forward for fifteen years. As
discussed in Note 15, the Company is a development stage entity. As such,
the Company lacks an operating history and therefore, a valuation allowance
has been recorded to offset the deferred tax assets and the benefit of
income taxes. Actual results could differ from this estimate.
10. INTERNATIONAL LICENSE AGREEMENTS:
--------------------------------
AlphaCom has entered into various exclusive international license and
distribution agreements. The agreements grant the licensee the right to
market certain patented technology and products in specified markets
throughout the world. The agreements require an initial license fee plus
additional license fees upon the grant of sub-licenses to third parties by
the licensee. In addition, the agreements provide for royalties to be paid
to AlphaCom based on the number of individual users of the technology in
each market. Each agreement has a term of ten years unless terminated by
the parties for cause.
Revenue from the sale of these agreements is recognized on a straight-line
basis over the ten year term of the agreements. License fee income
recognized on these contracts during the six months ended June 30, 2000
totaled $44,041. There were no exclusive international license and
distribution agreements at June 30, 1999.
AlphaCom is responsible for the protection of the patent rights for the
licensee during the license period. Additionally, certain agreements
contain performance criteria, which must be satisfied by AlphaCom and the
licensee.
11. RELATED PARTY TRANSACTIONS:
--------------------------
Certain key officers of AlphaCom have agreed to defer a percentage of their
compensation until such time as AlphaCom completes its anticipated public
offering. Amounts deferred through June 30, 2000 and 1999 totaling $136,918
and $132,420, respectively have been included as current liabilities in the
accompanying consolidated combined financial statements.
See Notes 2 and 4 for discussion of other related party transactions.
F-14
<PAGE> 47
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
12. ACQUISITION OF TECHNOLOGY RIGHTS AND INVESTMENT COMMITMENT:
----------------------------------------------------------
In February of 2000, AlphaCom entered into a new agreement with a
corporation, superceding a prior agreement to establish a joint venture.
The new agreement terminates the former joint venture agreement and
transfers to AlphaCom the corporation's interest in certain technology for
the sum of $205,000 previously advanced to the corporation by AlphaCom.
The new agreement also provides that AlphaCom will invest $492,500 in the
corporation upon certain terms and conditions including mutual agreement as
to AlphaCom's ownership percentage and the completion of AlphaCom's planned
SB-2 offering.
13. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Effective December 4, 1998, AlphaCom entered into an agreement with an
entity whereby the entity will provide consulting services to AlphaCom and
Subsidiary. As a result of this agreement, AlphaCom is required to pay
$124,000 and to issue 124,000 shares of its stock to the consulting entity
for services rendered over the two-year term of the contract. In December
of 1999, the Agreement was renewed and amended to provide for a
clarification of consulting services to be provided in 2000. As of June 30,
2000, AlphaCom has expensed $104,500 of cash payments and issued 124,000
shares of stock (at $1 per share) required under the contract. In addition,
AlphaCom issued 8,800 shares (at $1 per share) in connection with
additional consulting services.
In November of 1999, AlphaCom entered into a stock purchase and option
agreement with an investor. Under terms of the agreement, AlphaCom sold to
the investor 20,000 shares of common stock at $5.00 per share. Further,
AlphaCom agreed to grant to the investor an option to purchase up to
980,000 additional shares of common stock of AlphaCom over a period of
twelve months from the date of the agreement. The option is conditional
upon the execution of a beneficial business arrangement with one or more
specific potential clients as set forth in a consulting agreement between
AlphaCom and the investor.
In December of 1999, AlphaCom entered into a conditional agreement to
acquire certain patents and inventions. The agreement has been structured
as a purchase of stock in the seller's corporations by AlphaCom. The
corporations have no significant past or current operations. Their
principal asset is the patents and technology. The aggregate purchase price
is $3,000,000. The agreement also provides for royalty payments over the
remaining life of the patents. The purchase price is due within 60 days of
the completion of AlphaCom's planned SB-2 offering. The agreement is
conditional upon completion of the planned SB-2 offering by August 18,
2000.
A maximum of 900,000 shares of common stock may be exchanged for up to
900,000 unregistered rescission shares on a one for one basis at $1.00 per
share in AlphaCom's planned SB-2 offering.
See Notes 2, 3 and 10 for discussion of other commitments.
14. RESEARCH AND DEVELOPMENT COSTS:
------------------------------
Research and development costs related to both future and present products
are charged to operations as incurred. The Company recognized approximately
$6,000 and $28,800 of research and development costs during the six months
ended June 30, 2000 and 1999, respectively.
F-15
<PAGE> 48
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued - UNAUDITED
15. DEVELOPMENT STAGE ENTITY:
------------------------
AlphaCom was formed in December 1997 to distribute high-technology
communication products and services to consumers who utilize the Internet.
Activities since that time have primarily been devoted to raising capital,
obtaining financing, product development and administrative functions. The
future viability of AlphaCom is dependent upon its ability to successfully
obtain sufficient capital and market acceptance of its products. AlphaCom
has developed operating plans based upon levels of cash flows and financing
ultimately achieved. There can be no assurance that AlphaCom will achieve
or sustain profitability or positive cash flow from its operations, which,
if not achieved, will materially adversely affect AlphaCom's business,
operating results and financial condition.
16. INCREASE IN AUTHORIZED COMMON STOCK:
-----------------------------------
On May 6, 1999, AlphaCom's stockholders held a special meeting where they
approved an increase in the number of authorized common shares from
20,000,000 to 60,000,000. This transaction had no effect on the number of
common shares outstanding or the par value of the common shares.
F-16
<PAGE> 49
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and
Board of Directors of AlphaCom, Inc. and Subsidiary and Affiliate:
We have audited the accompanying consolidated combined balance sheets of
AlphaCom, Inc. and Subsidiary and Affiliate (development stage companies) as of
December 31, 1999 and 1998, and the related consolidated combined statements of
operations, and cash flows for the years then ended and for the period from
April 19, 1996 (inception) to December 31, 1999 and changes in stockholders'
deficit for the years then ended. These consolidated combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated combined financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
combined financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated combined financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the consolidated combined financial statements referred to above
present fairly, in all material respects, the financial position of AlphaCom,
Inc. and Subsidiary and Affiliate as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for the years then ended and for
the period from April 19, 1996 (inception) to December 31, 1999 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As disclosed in the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 14. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
SPECTOR & SAULINO, CPAs, L.L.C.
Akron, Ohio
February 29, 2000
F-17
<PAGE> 50
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED BALANCE SHEETS
December 31, 1999 and 1998
-----
<TABLE>
<CAPTION>
ASSETS
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash $ 41,445 $ 8,332
Accounts receivable:
Trade 2,554 15,459
Employees -- 5,710
Other 21,389 7,540
Less: allowance for bad debts (5,001) (7,001)
----------- -----------
18,942 21,708
----------- -----------
Prepaid expenses and other current assets 1,282,278 268,505
Inventories 21,217 20,635
----------- -----------
Total current assets 1,363,882 319,180
----------- -----------
Property and equipment:
Machinery and equipment 130,990 38,790
Furniture and fixtures 38,133 38,132
Vehicles 54,537 54,539
Website in progress 119,416 --
Leasehold improvements 34,580 34,580
----------- -----------
377,656 166,041
Less accumulated depreciation
and amortization 66,206 19,072
----------- -----------
Total property, plant and equipment 311,450 146,969
----------- -----------
Other assets:
Patent rights 205,000 205,000
Advance on investment 7,500 --
Deferred registration costs 75,048 --
Deposits 5,579 13,340
----------- -----------
Total other assets 293,127 218,340
----------- -----------
Total assets $ 1,968,459 $ 684,489
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-18
<PAGE> 51
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED BALANCE SHEETS, Continued
December 31, 1999 and 1998
------
LIABILITIES AND STOCKHOLDERS' DEFICIT
1999 1998
---- ----
Current liabilities:
Notes payable, related party $ 666,306 $ 721,306
Notes payable, others, less unamortized
discount of $36,220 at December
31, 1998 2,035,500 713,780
Current portion of long-term debt 169,362 8,648
Accounts payable, trade 779,276 690,540
Accrued interest, related party 53,558 16,182
Accrued interest, others 129,724 36,457
Accrued expenses 361,022 56,648
Accrued consulting fee 1,000,000 --
Deferred compensation 145,681 101,300
----------- -----------
Total current liabilities 5,340,429 2,344,861
----------- -----------
Long-term liabilities:
Long-term debt, net of current portion 16,428 25,790
----------- -----------
Total long-term liabilities 16,428 25,790
----------- -----------
Total liabilities 5,356,857 2,370,651
----------- -----------
Stockholders' deficit:
Common stock (Note 7) 266,849 266,533
Additional paid-in capital 747,821 393,752
Treasury stock (1,653) (1,653)
Deficit accumulated during the development
stage (4,401,415) (2,344,794)
----------- -----------
Total stockholders' deficit (3,388,398) (1,686,162)
----------- -----------
Total liabilities and stockholders' equity $ 1,968,459 $ 684,489
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-19
<PAGE> 52
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999 and 1998
and for the period from inception through December 31, 1999
------
<TABLE>
<CAPTION>
Cumulative
From Inception
April 19, 1996 to
December 31, 1999 1999 1998
----------------- ---- ----
<S> <C> <C> <C>
Net sales, communication equipment $ 369,740 $ 139,409 $ 177,322
Cost of sales, communication equipment 146,737 44,493 58,333
------------- ----------- -----------
Gross profit, equipment 223,003 94,916 118,989
------------- ----------- -----------
Net sales, communication services 156,070 109,776 46,294
Cost of sales, communication services 43,711 19,390 24,321
------------- ----------- -----------
Gross profit, services 112,359 90,386 21,973
------------- ----------- -----------
Total gross profit 335,362 185,302 140,962
Selling, general and administrative
expenses 4,333,436 2,028,551 1,933,094
------------- ----------- -----------
Loss from operations (3,998,074) (1,843,249) (1,792,132)
------------- ----------- -----------
Other income (expense):
Other 9,276 -- 9,276
Interest expense (412,617) (213,372) (197,639)
------------- ----------- -----------
Total other expense (403,341) (213,372) (188,363)
------------- ----------- -----------
Net loss $ (4,401,415) $(2,056,621) $(1,980,495)
============= =========== ===========
Net loss per common share $ (.43) $ (.17) $ (.14)
============= =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-20
<PAGE> 53
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENT OF CHANGES IN
SHAREHOLDERS' DEFICIT
for the years ended December 31, 1999 and 1998
---
<TABLE>
<CAPTION>
Number of
Common Deficit
Shares Accumulated
Issued and Par Value Additional Treasury During the Total
Date of Outstanding of Common Paid-in Stock Development Shareholders'
Transaction Note 7 Stock Capital Note 7 Stage Deficit
----------- ------ ----- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,1997 8,025,749 $ 258,175 $ 3,814 $ - $ (364,299) $ (102,310)
Stock issued 1/30/98 1 4,400 - - - 4,400
Stock issued to key
employees ($.001
per share). 1/30/98 1,272,000 1,272 - - - 1,272
Stock issued for
limited asset purchase
from Alpha Beta Communi-
cations, Inc. ($.001 per
share). See Note 2. 7/2/98 1,653,292 1,653 - (1,653) - -
Stock issued in association
with debt. ($.18 per share).
See Note 5. Various 750,000 750 134,281 - - 135,031
Stock issued to key
employees ($.18 per
share). 9/3/98 33,000 33 5,907 - - 5,940
Stock issued via private
placement ($1.00 per
share). 10/8/98 250,000 250 249,750 - - 250,000
Net loss - - - - (1,980,495) (1,980,495)
----------- ---------- ---------- --------- ------------ ------------
Balances at December 31, 1998 11,984,042 $ 266,533 $ 393,752 $ (1,653) $ (2,344,794) $ (1,686,162)
Stock issuance costs 3/31/99 - - (41,415) - - (41,415)
Stock issued to key
employees ($1.00
per share). 4/19/99 156,000 156 155,844 - - 156,000
Stock issued in connection
with consulting services
($1.00 per share). 6/1/99 59,000 59 58,941 - - 59,000
Stock issued to key
employees ($1.00
per share). 11/5/99 7,000 7 6,993 - - 7,000
Stock issued in connection
with consulting service
($1.00 per share). 11/10/99 73,800 74 73,726 - - 73,800
Stock issued in connection
with stock purchase and
option agreement ($5.00
per share). 11/23/99 20,000 20 99,980 - - 100,000
Net loss - - - - (2,056,621) (2,056,621)
----------- ---------- ---------- --------- ------------ ------------
Balances at December 31, 1999 12,299,842 $ 266,849 $ 747,821 $ (1,653) $ (4,401,415) $ (3,388,398)
=========== ========== ========== ========= ============ =============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-21
<PAGE> 54
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999 and 1998
and for the period from inception through December 31, 1999
Increase (Decrease) in Cash
-----
<TABLE>
<CAPTION>
Cumulative
From Inception
April 19, 1996 to
December 31, 1999 1999 1998
----------------- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,401,415) $(2,056,621) $(1,980,495)
-------------- ----------- -----------
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 242,706 124,854 109,128
Stock issued to key employees for
compensation 170,212 163,000 7,212
Stock issued in connection with
consulting services 132,800 132,800 --
(Increase) decrease in assets:
Accounts receivable, trade (2,554) 12,905 (15,459)
Accounts receivable, employees -- 5,710 (5,710)
Accounts receivable, other (21,389) (13,849) (7,540)
Allowance for bad debts 5,001 (2,000) 7,001
Prepaid expenses and other current assets (323,778) (55,273) (267,255)
Inventories (21,217) (582) (20,635)
Deferred registration costs (75,048) (75,048) --
Deposits (5,579) 7,761 12,379
Increase (decrease) in liabilities:
Accounts payable, trade 779,276 88,736 664,066
Accrued interest, related party 53,558 37,376 16,182
Accrued interest, others 129,724 93,267 36,457
Accrued expenses 319,607 262,959 56,648
Deferred compensation 145,681 44,381 69,800
-------------- ----------- -----------
Total adjustments 1,529,000 826,997 662,274
-------------- ----------- -----------
Net cash used in operating activities (2,872,415) (1,229,624) (1,318,221)
-------------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (377,656) (211,615) (33,579)
Purchase of patent rights (205,000) -- (205,000)
Advance on investment (7,500) (7,500) --
-------------- ----------- -----------
Net cash used in investing activities (590,156) (219,115) (238,579)
-------------- ----------- -----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-22
<PAGE> 55
ALPHACOM, INC. AND SUBSIDIARY AND AFFILIATE
(development stage companies)
CONSOLIDATED COMBINED STATEMENTS OF CASH FLOWS, Continued
for the years ended December 31, 1999 and 1998
and for the period from inception through December 31, 1999
Increase (Decrease) in Cash
------
<TABLE>
<CAPTION>
1 Cumulative
From Inception
April 19, 1996 to
December 31, 1999 1999 1998
----------------- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt 203,924 160,000 --
Repayment of long-term debt (18,134) (8,648) (7,051)
Proceeds from notes payable, related party 721,306 -- 721,306
Repayment of notes payable, related party (55,000) (55,000) --
Proceeds from notes payable, others 2,045,000 1,430,000 454,000
Repayment of notes payable, others (144,500) (144,500) --
Proceeds from the sale of stock 751,420 100,000 389,431
---------------- ----------- -----------
Net cash provided by financing
activities 3,504,016 1,481,852 1,557,686
---------------- ----------- -----------
Net increase in cash 41,445 33,113 886
Cash, beginning of year -- 8,332 7,446
---------------- ----------- -----------
Cash, end of year $ 41,445 $ 41,445 $ 8,332
================ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 130,555 $ 82,729 $ 46,220
================ =========== ===========
Supplemental disclosure of non-cash
investing and financing activities:
</TABLE>
During 1999, the Company entered into a consulting agreement that contained
a non-refundable fee of 200,000 shares of AlphaCom stock. This fee was
recorded as a prepaid expense and accrued liability at December 31, 1999
(Note 3).
During 1999, the Company accrued certain stock issuance costs totaling
$41,415.
During 1999, the Company issued stock in connection with consulting
services (Note 12).
The Company issued stock to certain key employees for compensation totaling
$163,000 and $7,212 during 1999 and 1998, respectively.
The accompanying notes are an integral
part of these financial statements.
F-23
<PAGE> 56
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS
-----
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
AlphaCom, Inc. ("AlphaCom") was incorporated on December 1, 1997 under the
laws of the State of Nevada and commenced operations on January 1, 1998.
AlphaCom will distribute high-technology communication products and
services to consumers who utilize the internet. Sales and distribution will
be accomplished through a network marketing system in North America and
through authorized distributors and licensees in countries outside of North
America.
The following is a summary of significant accounting policies:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated combined financial statements include the
accounts of AlphaCom and its wholly-owned subsidiary (AlphaCom Canada,
Ltd.) together with Alpha Beta Communication, Inc., a company affiliated
through common management and ownership (the "Company"). All significant
intercompany profits, balances, and transactions have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION
The Company's account balances that are in Canadian currency (which result
from the Canadian subsidiary) have been translated in accordance with SFAS
No. 52, "Foreign Currency Translation." Assets and liabilities have been
translated at exchange rates as of the end of the year. Income and expense
accounts have been translated at the average exchange rates during the
year. Due to limited activity at the Canadian subsidiary, there were no
transaction gains and losses from remeasurement of monetary assets,
liabilities, income and expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held
for trading purposes. The Company estimates that the fair value of all
financial instruments at December 31, 1999 and 1998 does not differ
materially from the aggregate carrying values of its financial instruments
recorded in the accompanying balance sheets. The estimated fair value
amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgment
is necessarily required in interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
INVENTORIES
Inventories consist primarily of computer communication hardware and
software and are stated at lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Major additions and betterments
are charged to the property accounts while replacements, maintenance and
repairs which do not improve or extend the life of the respective assets
are expensed currently. When property is retired or otherwise disposed of,
the cost of the property is removed from the asset account, accumulated
depreciation is charged with an amount equivalent to the depreciation
provided, and the difference is charged or credited to income.
F-24
<PAGE> 57
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued
-----
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(Continued)
DEPRECIATION
Depreciation is provided using primarily the straight-line method over the
estimated useful lives of the assets for financial statement purposes;
accelerated methods are primarily used for tax purposes.
PATENT RIGHTS
Patent rights will be amortized over the shorter of the period benefited
from the sale of the technology or the remaining life of the patent. No
amortization has been recorded as sales of the technology have not
commenced.
INCOME TAXES
Income taxes are provided for the tax effect of transactions reported in
the consolidated combined financial statements and consist of taxes
currently due plus deferred taxes related primarily to net operating loss
carryforwards and differences between the basis of property and equipment
and various reserves and accruals for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled (Note
9).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable.
The Company grants credit to its customers. The Company performs ongoing
credit evaluations of its customers and does not require collateral.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates inherent in the
financial statements include allowance for bad debts, depreciation and
amortization of property, plant and equipment, intangible assets and
deferred costs. Actual results could differ from those estimates.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution
that could occur if the dilutive agreement resulted in the issuance of
common stock that then shared in the earnings of the Company.
At December 31, 1999, 32,000 shares of potential common stock related to
detachable warrants on a secured loan agreement (Note 6) were excluded from
the computation of diluted loss per share because their inclusion would
have an antidilutive effect on loss per share.
F-25
<PAGE> 58
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued
-----
2. LIMITED ASSET PURCHASE:
In July of 1998, AlphaCom entered into a Limited Asset Purchase Agreement
(Agreement) with Alpha Beta Communications, Inc. ("ABC"). An officer
stockholder of AlphaCom owned 92% of ABC at the time of the Agreement. The
Agreement provided for the purchase of substantially all of the assets and
assumption of certain liabilities of ABC in exchange for $475,767 due
AlphaCom from ABC and the issuance of 1,653,354 shares of $.001 par value
common stock, issued to the minority stockholders of ABC. The tangible
assets acquired included accounts receivable, inventories, property and
equipment, prepaid and other assets. Management estimated the fair market
value of these assets to be $208,950. In addition, AlphaCom acquired
intangible assets including trade names, client list, distributor base
and/or subscribers. As part of the transaction, AlphaCom also assumed
liabilities of $37,507. In addition, AlphaCom has a commitment to pay
$200,000 to ABC's majority stockholder, who is also a stockholder in
AlphaCom, contingent upon a successful public offering of AlphaCom.
The transaction, between entities under common control, has been recorded
utilizing historical costs for recorded asset and liability accounts and
par value for common stock issued. No value has been assigned to intangible
assets acquired.
AlphaCom exchanged 1,653,354 shares of its common stock for net assets of
ABC. The issuance of AlphaCom's shares has been recorded at par value
($.001 per share). ABC exchanged AlphaCom's stock for the minority shares
outstanding (totaling 62 shares) of ABC. The minority shares are held as
treasury stock of ABC and valued at par value of AlphaCom's shares.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Prepaid royalties $ 320,000 $ 250,000
Deferred consulting expense 958,500 -
Prepaid rent and expenses 3,778 18,505
------------ -----------
$ 1,282,278 $ 268,505
============ ===========
</TABLE>
The Company prepaid royalties due on sales of software made available
through a development firm. These royalties will be amortized, on a per
unit basis, as sales of software commence in May of 2000. According to the
agreement with the licensor, the prepaid royalty can only be used to offset
future royalties, no portion of the prepaid amount can be refunded to
AlphaCom.
In December of 1999, AlphaCom entered into a consulting agreement with an
entity to provide financial advice and other services. As part of the
agreement, AlphaCom agreed to pay a nonrefundable consulting fee of 200,000
shares of common stock. The shares are payable 100,000 shares of restricted
stock upon signing of the agreement and 100,000 registered shares payable
in four to six months. The agreement has an initial term of twelve months.
The agreement also provides for a monthly advisory fee of $10,000
commencing January of 2000 and a success fee based upon a percentage of
capital and/or other consideration provided through the efforts of the
entity.
The non-refundable consulting fee of 200,000 shares valued by management at
$5 per share has been shown as a prepaid expense and accrued liability at
December 31, 1999. The prepaid fee is being amortized on a monthly basis
over one year commencing December 15, 1999. The accrued liability will be
satisfied through the issuance of 200,000 shares of stock during 2000.
F-26
<PAGE> 59
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued
-----
4. NOTES PAYABLE, RELATED PARTY:
AlphaCom has notes payable to an officer-stockholder amounting to $666,306
and $721,306 at December 31, 1999 and 1998. The notes bear interest at
rates ranging from 5.1% to 5.6%, are unsecured and are payable at the later
of the completion of AlphaCom's planned SB-2 offering or July 31, 2000. The
weighted average of the interest rates is 5.54% and the estimated fair
value of these notes equals their book value at December 31, 1999.
Accrued interest on notes payable, officer-stockholder amounted to $53,558
and $16,182 at December 31, 1999 and 1998. No interest has been paid on
notes payable, officer-stockholder.
5. NOTES PAYABLE, OTHERS:
Notes payable, others consist of two components notes payable, bridge loan
and notes payable, others. The details of these components are as follows:
In 1998 AlphaCom entered into bridge loan financing with a number of
individual creditors and issued unsecured notes payable. The notes payable,
bridge loan aggregate $645,500 and $713,780 at December 31, 1999 and 1998,
respectively. The terms of the notes include interest at a stated rate of
12% per annum together with one share of AlphaCom's $.001 par value common
stock for each one dollar borrowed. For purposes of this transaction,
management valued the common stock at $.18 per share at the time of the
stock issuance. The notes mature at the later of the completion of
AlphaCom's planned SB-2 offering or July 31, 2000.
The aggregate discount on the notes payable, bridge loan was determined by
management to be approximately $135,000 and was amortized over the
estimated life of the notes. The discount was fully amortized as of
December 31, 1999. The estimated fair value of these notes equals their
book value.
Notes payable, others in the amount of $1,390,000 at December 31, 1999
consists of notes and advances payable to individuals bearing interest at
12% to 14%. The notes and advances are unsecured and are due July 31, 2000.
Certain notes and advances payable contain warrants that allow the holders
an option to convert all or any part of the note into 194,000 shares of
AlphaCom at the estimated $5.00 offering price per share within five
business days of the effective date of the planned SB-2 offering.
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Senior secured loan agreement bearing interest at 12%.
The note matures July 31, 2000 at which time
a balloon payment for the entire principal is due. $ 160,000 $ -
Note payable, bank, due in monthly installments
of $453, including interest at 8.39%. The note
payable is collateralized by a vehicle and matures
July 2002. 12,596 16,787
</TABLE>
F-27
<PAGE> 60
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued
-----
6. LONG-TERM DEBT: (Continued)
<TABLE>
<S> <C> <C>
1999 1998
---- ----
Note payable, bank, due in monthly installments of $468,
including interest at 10.17%. The note payable is
collateralized by a vehicle and matures July 2002. 13,194 17,651
-------------- --------------
185,790 34,438
Less current maturities 169,362 8,648
-------------- --------------
$ 16,428 $ 25,790
============== ==============
</TABLE>
On March 26, 1999 AlphaCom entered into a senior secured loan agreement
with a lender. Under the terms of the agreement, the lender was to use its
best efforts to loan $2,500,000 to AlphaCom from the sale of participation
interests to investors. The lender required the pledge of all of the assets
of AlphaCom as security for the loan. The loan agreement provided for
detached warrants to the lender for the purchase of up to 500,000 shares of
AlphaCom's common stock, at $1.00 per share, limited to 20% of the dollar
amount loaned to the Company. The warrants cannot be exercised until one
year from the date of the loan and expire after five years from the date of
the loan. The agreement expired July 15, 1999.
At December 31, 1999, under the terms of the agreement, the lender has a
warrant for 32,000 shares of the common stock of AlphaCom.
The book value of these notes equals their estimated fair market value at
December 31, 1999. The following is a schedule of maturities for the next
three years ending December 31 and in the aggregate for long-term debt owed
by AlphaCom at December 31, 1999:
2000 $ 169,362
2001 10,135
2002 6,293
------------
$ 185,790
============
7. STOCKHOLDERS' DEFICIT:
The consolidated combined stockholders deficit at December 31, 1999 and
1998 are composed of:
<TABLE>
<CAPTION>
Number of
Common
Shares Par value Additional
Year Issued and of common Paid-in Treasury Accumulated
1999 Outstanding Stock Capital Stock Deficit Total
---- ----------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
AlphaCom, Inc.
and subsidiary 12,299,154 $ 12,299 $ 744,007$ - $ (3,476,441) $ (2,720,135)
Alpha Beta
Communica-
tions, Inc. 688 254,550 3,814 (1,653) (924,974) (668,263)
------------ ---------- ----------- ---------- -------------- -------------
12,299,842 $ 266,849 $ 747,821 $ (1,653) $ (4,401,415) $ (3,388,398)
============ ========== =========== ========== ============== =============
</TABLE>
F-28
<PAGE> 61
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued
-----
7. STOCKHOLDERS' DEFICIT: (Continued)
<TABLE>
<CAPTION>
Number of
Common
Shares Par value Additional
Year Issued and of common Paid-in Treasury Accumulated
1998 Outstanding Stock Capital Stock Deficit Total
---- ----------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
AlphaCom, Inc.
and subsidiary 11,983,354 $ 11,983 $ 389,938$ - $ (1,419,820) $ (1,017,899)
Alpha Beta
Communica-
tions, Inc. 688 254,550 3,814 (1,653) (924,974) (668,263)
------------ ---------- ------------ ---------- -------------- -------------
11,984,042 $ 266,533 $ 393,752 $ (1,653) $ (2,344,794) $ (1,686,162)
============ ========== ========== ========== ============== =============
</TABLE>
As noted in Note 15, AlphaCom has authorized common shares of 60,000,000.
Alpha Beta Communications, Inc. has authorized common shares of 750.
Treasury shares at December 31, 1999 and 1998 consist of 62 shares of Alpha
Beta Communications, Inc. acquired in connection with the Limited Asset
Purchase described in Note 2.
8. OPERATING LEASE COMMITMENTS:
AlphaCom is obligated under non-cancelable leases for the use of the
operating facility, an automobile and a copier. The leases expire at
various dates through 2001 and the facility lease allows for one one-year
renewal beginning in December 2000. Certain of the leases require the
lessee to bear the cost of insurance and maintenance.
Approximate future minimum obligations under non-cancelable lease
commitments for years ending December 31 are as follows:
2000 $ 7,457
2001 908
Rent expense was approximately $65,000 and $44,000 in 1999 and 1998,
respectively.
9. INCOME TAXES:
The following reconciles income taxes (benefit) reported in the
consolidated combined financial statements to taxes that would be obtained
by applying the U.S. federal statutory rate to loss before income taxes
(benefit) at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Expected benefit using statutory rate of 34% $ (699,251) $ (673,368)
Non-deductible expenses 6,313 2,237
Taxable gain on limited asset purchase - 106,635
Deductible expenses (10,233) (5,116)
State income tax benefit (119,125) (96,499)
Other 296 (1,889)
Increase in valuation allowance 822,000 668,000
------------ ------------
Benefit of income taxes $ - $ -
============ =============
</TABLE>
F-29
<PAGE> 62
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued
-----
9. INCOME TAXES: (Continued)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
The deferred tax assets consist of the following
components:
Deferred federal short-term tax asset $ 65,000 $ 2,000
Deferred state short-term tax asset 11,000 --
Valuation allowance (76,000) (2,000)
----------- -----------
Total deferred short-term tax asset $ -- $ --
=========== ===========
Deferred federal long-term tax asset $ 1,342,000 $ 695,000
Deferred state long-term tax asset 227,000 118,000
Deferred federal long-term tax liability (9,000) (3,000)
Deferred state long-term tax liability (2,000) --
Valuation allowance (1,558,000) (810,000)
----------- -----------
Total deferred long-term tax asset $ -- $ --
=========== ===========
</TABLE>
Federal and state deferred tax assets related to net operating loss
carryforwards are approximately $1,342,000 and $227,000, respectively. The
federal net operating loss may be carried forward for twenty years while
the state net operating loss may be carried forward for fifteen years. As
discussed in Note 14, the Company is a development stage entity. As such,
the Company lacks an operating history and therefore, a valuation allowance
has been recorded to offset the deferred tax assets and the benefit of
income taxes. Actual results could differ from this estimate.
10. RELATED PARTY TRANSACTIONS:
Certain key officers of AlphaCom have agreed to defer a percentage of their
compensation until such time as AlphaCom completes its anticipated public
offering. Amounts deferred through December 31, 1999 and 1998 totaling
$145,681 and $101,300, respectively have been included as current
liabilities in the accompanying consolidated financial statements.
See Notes 2, 4 and 5 for discussion of other related party transactions.
11. ACQUISITION OF TECHNOLOGY RIGHTS AND INVESTMENT COMMITMENT:
In February of 2000, AlphaCom entered into a new agreement with a
corporation, superceding a prior agreement to establish a joint venture.
The new agreement terminates the former joint venture agreement and
transfers to AlphaCom the corporation's interest in certain technology for
the sum of $205,000 previously advanced to the corporation by AlphaCom.
The new agreement also provides that AlphaCom will invest $492,500 in the
corporation upon certain terms and conditions including mutual agreement as
to AlphaCom's ownership percentage and the completion of AlphaCom's planned
SB-2 offering.
12. COMMITMENTS AND CONTINGENCIES:
Effective December 4, 1998, AlphaCom entered into an agreement with an
entity whereby the entity will provide consulting services to AlphaCom and
Subsidiary. As a result of this agreement, AlphaCom is required to pay
$124,000 and to issue 124,000 shares of its stock to the consulting entity
for services rendered over the two year term of the contract. In December
of 1999, the agreement was renewed and amended to provide for a
clarification of consulting services to be provided in 2000. As of December
31, 1999, AlphaCom has expensed $78,500 of cash payments and issued 124,000
shares (at $1 per share) of stock required under the contract. In addition,
AlphaCom issued 8,800 shares (at $1 per share) in connection with
additional consulting services.
F-30
<PAGE> 63
NOTES TO CONSOLIDATED COMBINED FINANCIAL STATEMENTS, Continued
-----
12. COMMITMENTS AND CONTINGENCIES: (Continued)
In November of 1999, AlphaCom entered into a stock purchase and option
agreement with an investor. Under terms of the agreement, AlphaCom sold to
the investor 20,000 shares of common stock at $5.00 per share. Further,
AlphaCom agreed to grant to the investor an option to purchase up to
980,000 additional shares of common stock of AlphaCom over a period of
twelve months from the date of the agreement. The option is conditional
upon the execution of a beneficial business arrangement with one or more
specific potential clients as set forth in a consulting agreement between
AlphaCom and the investor.
In December of 1999, AlphaCom entered into a conditional agreement to
acquire certain patents and inventions. The agreement has been structured
as a purchase of stock in the seller's corporations by AlphaCom. The
corporations have no significant past or current operations. Their
principal asset is the patents and technology. The aggregate purchase price
is $3,000,000. The agreement also provides for royalty payments over the
remaining life of the patents. The purchase price is due within 60 days of
the completion of AlphaCom's planned SB-2 offering. The agreement is
conditional upon completion of the planned SB-2 offering by August 18,
2000.
A maximum of 900,000 shares of common stock may be exchanged for up to
900,000 unregistered rescission shares on a one for one basis at $1.00 per
share in AlphaCom's planned SB-2 offering.
See Notes 2, 3 and 10 for discussion of other commitments.
13. RESEARCH AND DEVELOPMENT COSTS:
Research and development costs related to both future and present products
are charged to operations as incurred. The Company recognized approximately
$89,000 and $844,200 of research and development costs during the years
ended December 31, 1999 and 1998, respectively.
14. DEVELOPMENT STAGE ENTITY:
AlphaCom was formed in December 1997 to distribute high-technology
communication products and services to consumers who utilize the Internet.
Activities since that time have primarily been devoted to raising capital,
obtaining financing, product development and administrative functions. The
future viability of AlphaCom is dependent upon its ability to successfully
obtain sufficient capital and market acceptance of its products. AlphaCom
has developed operating plans based upon levels of cash flows and financing
ultimately achieved. There can be no assurance that AlphaCom will achieve
or sustain profitability or positive cash flow from its operations, which,
if not achieved, will materially adversely affect AlphaCom's business,
operating results and financial condition.
15. INCREASE IN AUTHORIZED COMMON STOCK:
On May 6, 1999, AlphaCom's stockholders held a special meeting where they
approved an increase in the number of authorized common shares from
20,000,000 to 60,000,000. This transaction had no effect on the number of
common shares outstanding or the par value of the common shares.
F-31
<PAGE> 64
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY US. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED
BY THIS PROSPECTUS, OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE OF THE PROSPECTUS.
UNTIL OCTOBER 31, 2000 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary.......................................... 3
Our Company...................................... 3
The Offering..................................... 3
Risk Factors..................................... 5
Use of Proceeds.................................. 6
Dilution......................................... 7
Capitalization................................... 9
Plan of Distribution............................. 9
Management Discussion of Analysis of Financial
Condition and Results of Operations............ 9
Year 2000 Readiness Disclosure................... 12
Business......................................... 13
Principal Shareholders........................... 20
Management....................................... 21
Certain Transactions............................. 25
Description of Securities........................ 26
Shares Eligible for Future Sale.................. 27
Available Information............................ 27
Dividend Policy.................................. 28
Stock Transfer Agent............................. 28
Experts.......................................... 29
Legal Matters.................................... 29
Index to Financial Statements.................... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
ALPHACOM, INC.
2,800,000
SHARES COMMON STOCK
(PAR VALUE $.001 PER SHARE)
[ALPHACOM LOGO]
AlphaCom, Inc.
1035 Rosemary Boulevard
Akron, Ohio 44306
PROSPECTUS
------------------------------------------------------
------------------------------------------------------
<PAGE> 65
Part II-INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The information required by this item is incorporated by reference to
"indemnification" in the prospectus herein.
At present we have not entered into individual indemnity agreements
with our Officers or Directors. However, our By-Laws and Certificate of
Incorporation provide a blanket indemnification that we shall indemnify, to the
fullest extent under Nevada law, our directors and officers against certain
liabilities incurred with respect to their service in such capabilities. In
addition, the Certificate of Incorporation provides that the personal liability
of our directors and officers and our stockholders for monetary damages will be
limited.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer or controlling person 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, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and we will be governed by the final adju-
dication of such case.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee $ 5,949.20
Blue Sky Fees and Expenses $ 10,000.00
Legal Fees and Expenses $ 26,000.00
Printing and Engraving Expenses $ 5,000.00
Accountant's Fees and Expenses $ 53,000.00
------------------
Total $ 99,949.20
The foregoing expenses, except for the SEC fees, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Unregistered Securities Sold within the past three years
The following sets forth information relating to all
previous sales of common stock by the Registrant
which sales were not registered under the Securities
Act of 1933.
On December 5, 1997, the board of directors authorized
the initial issuance of an aggregate of 8,025,000
shares as founder's stock at a price of $.001 per
share to Messrs. Robert and Dennis Snyder and their
adult children. On January 30, 1998, the board
authorized the issuance of an aggregate of 1,272,000
shares as founder's stock to its employees, and
advisors to the Company at a price of $.001 per
share, to approximately 26 individuals. Subsequently,
on September 30, 1998, 33,000 shares were issued to
employees at a price of $.18 per share. These
issuances were made in reliance on Section 4(2) of
the Securities Act of 1933, and we believe the
acquirers were accredited or sophisticated investors.
Pursuant to the asset acquisition of Alpha Beta in
July, 1998, we issued 1,653,354 shares, which were
exempt from regis-
<PAGE> 66
tration under Section 4(2) of the Securities and
Exchange Act since it was an exchange of assets
between corporations. A copy of the contract is
incorporated by reference from the exhibits in the
SB-2 registration statement. We believe the acquirers
in the exchange were accredited or sophisticated
investors.
Pursuant to a public offering of securities effected
between July 27, 1998 and September 9, 1998, we
issued 750,000 shares, at a price of $1.00 per share,
for an aggregate consideration of $750,000. There
were no brokers or underwriters. No sales commissions
were paid in connection with the offering. The
foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to
Rule 504 of Regulation D on the basis that the
transactions involved a public offering of less than
$1,000,000.
In the fall of 1998, approximately 970,000 shares of
founders' stock were privately sold to some of our
distributors. These shares were not sold pursuant to
an effective registration statement, and may have
been sold without an available exemption from the
registration requirements of the applicable federal
or state securities laws. As a result, we believed
that the distributors who received these shares had a
right to ask for a refund of their purchase price or
to receive duly registered shares in exchange for
their shares. Up to 900,000 shares are being
registered in this offering for that purpose. We
believe that we have, or will through the completion
of this rescission offer, satisfied our securities
law obligations to these distributors. No information
was sought whether these purchasers were accredited
or sophisticated investors.
In November 1998, the board of directors authorized the
issuance of 124,000 shares, plus incentives, in
connection with a consulting contract for services
rendered. We entered into this transaction in
reliance on Section 4(2) of the Securities Act of
1933; as we believe the corporate acquirer to be a
sophisticated investor. The board also reserved
500,000 shares to fund warrants to be issued in
connection with a proposed loan of $2,500,000.
Warrant holders will be entitled to purchase common
stock at $1.00 a share after holding the warrants for
one year. The actual loan was completed for $160,000
with 32,000 warrants. This transaction was a private
sale under Section 4(2) of the Securities Act of
1933, and the corporate lender/acquirer is an
accredited investor.
Pursuant to a private placement of securities effected
between October 8, 1998 and June 8, 1999, we sold
250,000 shares to 20 investors, each of whom
subscribed to purchase the shares, at a price of
$1.00 per share, for aggregate consideration of
$250,000. There were no brokers or underwriters. No
sales commissions were paid in connection with this
offering. The foregoing purchases and sales were
exempt from registration under the Securities Act
pursuant to Rule 506 of Regulation D on the basis
that subscriptions for the offering were not
solicited by advertising to the public and the
transactions were private. The purchases and their
status are listed in the following table (ii).
On April 19, 1999, the board of directors set aside
300,000 additional shares at $1.00 per share to be
issued to employees in lieu of cash bonuses, of which
163,000 have been issued, in reliance on Section 4(2)
of the Securities Act of 1933. All but one of the
employees/acquirers qualifies as accredited investors
under Rule 215(d) of the Securities Act of 1933.
On November 23, 1999, we entered into a stock purchase
with an Alabama corporation and issued 20,000 shares
at a purchase price of $5.00 per share in reliance on
Section 4(2) of the Securities Act of 1933. In
addition, options to purchase up to 980,000 shares at
$5.00 per share were granted, subject to a
performance clause that must be satisfied on or
before November 23, 2000. We believe, based on
information from the corporation, that is an entity
in which all of the equity owners are accredited
investors.
We also issued warrants which would allow the holders
thereof to purchase up to 300,000 shares of our
common stock at the offering price per share included
in the proposed offering which may be exercised, at
the warrant holders option, within a one week time
frame after we receive approval from the Securities
and Exchange Commission on our offering. Each
issuance of warrants constituted a private
transaction under Section 4(2) of the Securities Act
of 1933 with persons believed by us to be accredited
investors.
In December 1999, we entered into a one-year contract
with a New York firm for financial services.
Compensation includes the contemplated issuance of
200,000 shares of stock at $5.00 per share.
All investors had the opportunity to ask questions
and receive answers from all of our officers,
directors and employees. In addition, they had access
to review all of our corporate records and material
contracts and agreements.
<PAGE> 67
<TABLE>
<CAPTION>
(i) List of persons to whom the public offering securities were sold.
---------------------------------------------------------------------
Between July 27, 1998 and September 9, 1998
<S> <C> <C>
Acuman Investment Group Mary Ann Jacob Joseph T. Shuster
Troy D. Allen Brett Job Glenn Silverhart
M. Michael Allison Shyam Joshi Jagdish Singh
Alfred Isaac Bageya Cynthia A. Kalman Dorothy M. Sprosty
Shane C. Bailey Andrew Kazmer Ronald R. Sprosty
BC Stone (BC Stone Partners) Trishia M. Sprosty
Rene Becker Peter D. King James Stamp
David P. Bell Brian Kirin Joel W. Stamp
Dan Berkley Steven J. Kosko Willard J. Stamp
Marlene Blaszczyk Chris Kulpinski Thomas J. Terry III
Henry M. Bockman Joseph Lechiara Thomas E. Tomasik
Thomas P. Bonacuse Barbara E. Lee Bac H. Tran
Stacy M. Brandt David Leslie Alan R. Trevarthen
Brimfield (Brimfield Fabrication) Kinson & Victoria Tso
Kevin S. Broderick Jerry Leslie Frank S. Turkovich
Brad Byler Paul D. Loftus Gary A. Viar
Santkumar Chopra Derrick S. Long Rich Vincenti
Mary Ann and George Cloos Rocco Lucadamo Garfield E. Vogen
Brian Cole Sharif Marzouk Frank A. Wahl
Joan Colling Dianne L. McCarthy Marjorie B. Webb
Travis L.Collins Kerri Meeks Michael T. Welsh
Russell A. Cramer Jr. Karen Mendenhall Bradley A. Wertz
Steven R. Cross Juanita Miller Brian E. Wertz
Lee Ann Daher Julie Murray Jonathan R. Wertz
Philip C. Davis Joann Nonno Wertz Enterprises, Inc.
Jon Jacobson & Sharon Denzel Ormsbee (Ormsbee Enterprises)
Donald W. Ellis Jimmy Pappas James T. White
Bill Fernald David C. Parks II Terry A. White
Max & Lisa Fink Barrett F. Parris Robert H. Wilkins III
Richard T. Fontanesi John L. Pearl Charles R. Williams
James Fryar Robbie Pendleton, Jr. Anthony K. Wilson
Masc A. Fugarino Sean A. Wilson Sheila P. Kelley
Luis J. Garcia Robert J. Phillips Sean Wilson
David R. Gorby Nathaniel M. Pine Jeffrey D. Zadra
Ted Gottschallk Edwin J. Pivcevich Jeffrey Dean Zadra II
Richard Grobman Stephen Porter Norbert Seidel
Donald Gross Ken Pridore Mark A. Shapiro
James Gryck Ardith L. Ries Dennis Sega
Gloria Muriel Hall Charles G. Salter Thomas M. Herman
Daniel J. Hardee Nick Santillo Joseph D. Horning
Willie G. Harrison A. Frank Sapper Andrew Inboden
Christine Henry Dr. Baldwin Sawyer Andrew J. Herman
June M.Schaut Shema (Shema Development)
Bruce G. & Lynn Davis Herphy
Daniel L. & Carol D. Petke
(ii) List of persons to whom the private placement offering securities were sold.
---------------------------------------------------------------------------------
Between October 8, 1998 and June 8, 1999
</TABLE>
Richard Brandt accredited
Bruce Clement accredited
<PAGE> 68
I. James Cummings sophisticated
Mary Dreiman accredited
Boris Goldstein accredited
Gilbert Hamrick, Jr. accredited
James Heiser accredited
Jimmy Pappas accredited
David Peters sophisticated
Steve Peters sophisticated
Daniel Peters, Sr. sophisticated
John Piscitelli, III accredited
John Piscitelli, Jr. accredited
William R. Shellhase, II accredited
Shema Development accredited
Joel W. Stamp accredited
Willard Stamp accredited
David Styer sophisticated
Bac Tran accredited
Edward J. Unaitis accredited
(iii) November, 1998
The Board of Directors authorized the issuance of 124,000 shares in
connection with a consulting contract for services rendered by ITM. A copy of
the contract is incorporated by reference from the exhibits in the SB-2
registration statement.
<PAGE> 69
ITEM 27. - EXHIBITS
Index to Exhibits
--------------------------------------------------------------------------------
SEC REFERENCE TITLE OF DOCUMENT LOCATION
NUMBER
--------------------------------------------------------------------------------
1.1 Subscription Agreement This filing page
--------------------------------------------------------------------------------
3.1 Articles of Incorporation Previously Filed
w/certification by J.M. Lechiara
--------------------------------------------------------------------------------
3.2 Amended Articles of Incorporation Previously Filed
--------------------------------------------------------------------------------
3.3 Bylaws Previously Filed
--------------------------------------------------------------------------------
10.1 Form of Sales Agreement Previously Filed
for Internet Service Subscribers
--------------------------------------------------------------------------------
10.2 Limited Asset Purchase Agreement(s) Previously Filed
dated July 2, 1998 by and between
AlphaCom, Inc. and stockholders of
Alpha Beta Communications, Inc.
--------------------------------------------------------------------------------
10.3 Lease Agreement on the premises Previously Filed
1035 Rosemary B'lvd., Akron, Ohio
--------------------------------------------------------------------------------
10.4 Addendum to Lease Agreement Previously Filed
at 1035 Rosemary B'lvd., Akron, Ohio
--------------------------------------------------------------------------------
10.5 Preliminary Agreement, with ITM Previously Filed
to establish a joint venture.
--------------------------------------------------------------------------------
10.6 Consulting Agreement with ITM Previously Filed
--------------------------------------------------------------------------------
10.7 Joint Venture agreement with Previously Filed
American Millennium Corporation, Inc.
--------------------------------------------------------------------------------
10.8 Contract with C-View Previously Filed
Technologies, Inc.
--------------------------------------------------------------------------------
10.9 Addendum to Contract with Previously Filed
C-View Technologies, Inc.
--------------------------------------------------------------------------------
10.10 Escrow and Subordination Previously Filed
Agreement (Lockup)
--------------------------------------------------------------------------------
10.11 Escrow Agreement Previously Filed
--------------------------------------------------------------------------------
10.12 Contract with New York
Consulting Group Previously Filed
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23.1 Consent of Spector This filing page
& Saulino, L.L.C., CPAs
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23.2 & Consent of Miles Garnett, Esq. This filing page
5.1
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27.1 Financial Data Schedule Previously Filed
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<PAGE> 70
ITEM 28. UNDERTAKINGS
The undersigned registrant undertakes:
(1) To file, during any period in which offer or sales are being made, a
post-effective amendment to this registration statement
To include any prospectus required by section I O(a)(3) of the
Securities Act of 1933;
To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment) which, individually or in the
aggregate, represent a fundamental change in the information
in the registration statement;
To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to the information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of securities at that time shall be deemed to be the
initial bona fide offering.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission any supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred to that section.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to our certificate of incorporation or provisions of
Nevada law, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission the indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. If a claim for
indemnification against liabilities (other than the payment by the Registrant)
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit, or proceeding is
asserted by a director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether the indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of the issue.
<PAGE> 71
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the City of Akron,
State of Ohio, on August 10, 2000.
(Registrant) ALPHACOM, INC.
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By /s/ Robert Snyder
----------------------------------------
Robert Snyder, President and
Chairman of the Board of Directors
In accordance with the Securities Act of 1933 this registration was
signed by the following persons in the capacities and on the dates indicated.
(Signature) /s/ Dennis Snyder
----------------------------------------
Dennis Snyder
Vice President of Customer Service
(Date) August 10, 2000
----------------------------------------
(Signature) /s/ Barry Gilliland
----------------------------------------
Barry Gilliland
Vice President Administration
(Date) August 10, 2000
----------------------------------------
(Signature) /s/ Joseph Lechiara
----------------------------------------
Joseph Lechiara
Chief Financial Officer
(Date)
August 10, 2000
----------------------------------------
(Signature)
----------------------------------------
(Type or Print Name)
(Title)
----------------------------------------
(Date)
----------------------------------------
Who must sign: the small business issuer, its principal executive
officer or officers, its principal financial officer, its controller or
principal accounting officer and at least the majority of directors or
persons performing similar functions.
