<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1999
Commission File Number 33-2474-LA
USA Talks.com, Inc.
(Exact name of registration as specified in its charter)
NEVADA 93-0915593
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4180 La Jolla Village Drive, #570
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices)
Registrant's telephone number
including area code (619) 546-0550
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports)
Yes X No
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, $0.001 par value, outstanding as of
March 31, 1999 was 76,632,219.
<PAGE>
PART 1
ITEM 1 - FINANCIAL STATEMENTS
The financial statements included herein have been reviewed by the
Company's independent accountants, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of March 31, 1999, and the results of its operation and changes in
its financial position from January 1, 1999 through March 31, 1999, have been
made. The results of its operations for such interim period are not necessarily
indicative of the results to be expected for the entire year.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995/FORWARD-LOOKING INFORMATION.
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's prospects, developments and business
strategies for its operations, including the development and sales of certain
new and established products. These forward-looking statements are identified
by their use of such terms and phrases as "believes" and "expects" and are
subject to risks and uncertainties and represent the Company's present
expectations or beliefs concerning future events. These forward-looking
statements and information relating to the Company that are based on the beliefs
of management as well as assumptions made by and information currently
available to management. Such statements reflect the current view of the
Company regarding future events and are subject to certain risks and
uncertainties as noted below. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
This commentary should be read in conjunction with the Financial Statements
and accompanying notes for a more complete understanding of USATalks.com's
financial position and results of operations.
QUARTER ENDED MARCH 31, 1999, COMPARED TO
QUARTER ENDED MARCH 31, 1998
<PAGE>
USATalks.com, Inc. is a development stage company that had no significant
revenues for its quarter ended March 31, 1999, and had no revenues for its
quarter ended March 31, 1998. The net loss for the Company's first quarter
ended March 31, 1999 was $3,929,703 as compared to $304,334 for the first
quarter ended March 31, 1998. A comparison of the operating expenses for the
quarters ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Selling, general and administrative $2,164,805 $ 36,322
Research and development $1,068,900 $158,039
Salaries and other compensation $ 557,603 $108,973
Legal $ 156, 579 $ 1,000
</TABLE>
For the quarter ended March 31, 1999, of the research and development expenses
of $1,068,900, $796,513 (20.3% of the net loss) were non-recurring. Of the net
loss for the first quarter ended March 31, 1999, $308,604 (including $150,000
non-recurring) or 7.9% was incurred in the establishment of the Company's
telemarketing operations; $184,261 (including $125,000 non-recurring) or 4.7%,
was incurred in the initial development of a new Web site and marketing
programs; $295,050 or 7.5% was charged as depreciation expense; $208,731 or
5.3% was incurred for legal fees.
All other operating expenses for the quarters ended March 31, 1999 and
1998 were incurred to fund on-going research activities on core technologies;
the design of the nationwide network, and business management and
administration of the various corporate activities, including efforts to raise
capital to execute the Company's strategic plan to design and build a national
network. For the quarter ended March 31, 1999, operating expenses included the
cost of contract negotiations with equipment and service vendors as well as
with competitive local exchange carriers and other carriers. These negotiations
have enabled the Company to continue with the deployment and testing of its
nationwide network, and to commence full operations, on March 1, 1999, of its
California IP network, which has been a beta test site operated on a "no fee"
basis through February 1999.
In summary, of the total losses for the quarter ended March 31, 1999,
$1,071,513 or 27% are for non-recurring expenses including consulting fees of
$796,513; the cost of establishing of telemarketing operations of $150,000; and
the cost of developing a new Web site and marketing programs of $125,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was approximately $2.5 million for the first
quarter ended March 31, 1999, compared to $1.9 million for the full year ended
December 31, 1998, reflecting a heightened level of activity in commencing the
installation and testing of the California network. Capital expenditures for the
first quarter consumed another $6.86 compared to $3.1 million for the entire
1998 year, substantially all of which for both periods was used for equipment
<PAGE>
purchases and installation costs for the build-out of the Company's private
national VOIP network. As of March 31, 1999, approximately $3.7 million in
equipment purchases and installation costs were in accounts payable as compared
to $2.5 million at December 31, 1998, reflecting purchases made pursuant to
purchase orders with the Company's primary equipment and service suppliers.
Cash on hand at March 31, 1999 was $1,1 million compared to $4.3 million at
December 31, 1998..
In order to meet its scheduled build-out and implementation dates over the
next 12-month period, the Company plans to expend additional capital, subject to
the availability of capital resources, for the construction of its private IP
network at the rate of approximately $1 million per month, or up to $12 million
in 1999; the Company could spend up to $36 million under a more accelerated plan
if sufficient funds are available on acceptable terms.
In addition, the Company will incur additional operating losses for the
year ending December 31, 1999 of as much as an estimated $5 million. A
substantial portion of the operating loss projected in 1999 will result from
selling and general and administrative expenses, including staff salaries and
the cost of consulting services required to oversee the network installation
prior to generating revenues in each new geographic area served. The Company
believes that revenue generation in any particular service area will follow
the initiation of service by at least 30 days. In addition, substantial
operating expenses will be incurred to lease bandwidth with sufficient capacity
to serve what is expected to be a rapidly growing residential subscriber and
commercial client customer base, for which on-going operating expense also will
precede revenue generation. Working capital requirements are limited as the
service is extended to the majority of customers on a prepaid basis, thereby
avoiding the illiquidity and collection issues associated with the build-up of
new customers.
During the quarter ended March 31, 1999, the Company completed $6.1
million in private debt and equity financing as compared to $9 million for the
year ended December 31, 1998. Approximately $20 million in additional capital
is needed to fund the Company's planned capital investments and budgeted
operating expenses in 1999. The Company anticipates that the required funds
will be obtained through the sale of additional equity securities, debt
financing and/or equipment lease arrangements. However, the Company's ability
to raise capital has been adversely affected by the trading suspension invoked
upon it by the SEC from January 29, 1999 through February 12, 1999, and its
aftermath, and may be affected by certain pending class actions. The on-going
SEC investigation may further hinder the Company from attracting new equity
investors and lenders, and there is no assurance that capital can be raised
through further equity sales, new credit facilities or other financing on terms
that will be acceptable to the Company.
Nonetheless, the Company believes it will be able to obtain the required
capital from the subsequent sale of equity or through new debt or leasing
arrangements based upon the strong continuing interest of prospective private
investors and others. This interest in the Company is driven by the sound
business fundamentals underlying its VOIP long-distance service, high
<PAGE>
profit margins and strong consumer demand for a low-cost, flat-rate
long-distance telephone service. Furthermore, once the nationwide network is
fully operational, the Company believes that it will be able to generate
substantial capital from on-going operations for investment in its expansion.
For information regarding an April 19, 1999 letter of intent to provide the
Company with $20 million of lease financing in connection with a proposed
marketing arrangement, see PART II, Item 5 under "Letter of Intent and
Equipment Leasing."
Upon completion of the initial phase of the national network, estimated to
be completed by June, 1999, the monthly cash requirements for recurring network
costs will be approximately $1 million to $1.5 million, and estimated monthly
recurring general and administrative, and employee expenses of an additional
$500,000 to $750,000 are expected to be required. Accordingly, early success in
marketing to produce sales revenues to offset these on-going fixed costs will
be critical to preserving capital and facilitating an ensuing accelerated
expansion of the nationwide network
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PENDING OR THREATENED LITIGATION, CLAIMS OR ASSESSMENTS (EXCLUDING UN-ASSERTED
CLAIMS AND ASSESSMENTS):
SEC INVESTIGATION. By Order dated January 29, 1999, the United States
Securities and Exchange Commission ("SEC") issued an Order Directing a
Private Investigation of the Company. The SEC then temporarily suspended the
over-the-counter trading of the securities of the Company. The temporary
suspension was effective on January 29, 1999 and terminated on February 11,
1999. The suspension occurred, according to the SEC, because questions were
raised about the accuracy and adequacy of the publicly disseminated
information concerning, among other things, the status and extent of the
Company's business operations. Although the temporary suspension has ended,
the SEC is continuing its investigation of the Company and no assurance as to
its outcome can be given.
TRENDMARK LITIGATION. The Company was named as a defendant in a lawsuit
filed by TrendMark, Inc. in the United States District Court for the Western
District of Tennessee on February 5, 1999. The Company previously had certain
marketing arrangements with TrendMark, which was once considered as an
acquisition candidate. The dispute relates to the termination of the Company's
relationship with TrendMark. Settlement proposals currently under discussion
contemplate the issuance of shares the Company's common stock and other
consideration in exchange for certain TremdMark assets.
JAMES V. RIBELLINO, JR., ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY
SITUATED V. USA TALKS.COM, INC., ALLEN J. PORTNOY, WILLIAM H.
<PAGE>
ERVINE AND JACK C. ALEXANDER, USDC Case No. 99 cv 0162K (JAH), filed January
29, 1999.
ROBERT ALLEN AND ANGELIQUE L. SALIBA, ON BEHALF OF THEMSELVES AND ALL
OTHERS SIMILARLY SITUATED V USA TALKS.COM, INC., ALLEN J. PORTNOY, WILLIAM H.
ERVINE AND JACK C. ALEXANDER, USDC Case No. 99 cv 0171 R (AJB), filed February
1, 1999.
CHRIS BRATCHER, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED V.
USA TALKS.COM, INC., ALLEN J. PORTNOY, WILLIAM H. ERVINE AND JACK C. ALEXANDER,
USDC Case No. 99 cv 0315 IEG (JAH), filed February 23, 1999.
WILLIAM LUBIN, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED V.
USA TALKS.COM, INC., ALLEN J. PORTNOY, WILLIAM H. ERVINE AND JACK C. ALEXANDER,
USDC Case No. 99 cv 0239 K (RBB), filed February 10, 1999.
These cases involve essentially identical alleged securities class action
lawsuits against the Company and its officers filed in the U.S. District Court
for the Southern District of California. The complaints allege claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder on behalf of an alleged class of persons who purchased the Company's
common stock from November 24, 1998 through January 28, 1999. The complaints
allege defendants made false or misleading statements and omitted to state
material facts necessary to make other representations not misleading
concerning the Company's products, their capabilities and the roll out schedule
for those products. The complaints were filed immediately after the Securities
and Exchange Commission temporarily suspended trading in the Company's stock.
KATHLEEN M. WOOD, INDIVIDUALLY AND ON BAHALF OF A CLASS OF OTHERS
SIMILARLY SITUATED AND BARRY B. GAUFMAN, INDIVIDUALLY AND ON BEHALF OF A CLASS
OF OTHERS SIMILARLY SITUATED V. MINOLTA CORPORATION, ET AL. LASC Case No. BC
199397, Filed February 24, 1999
This case is against 26 named defendants including the Company,
individually and on behalf of two defendants' classes similarly situated. The
complainants allege unlawful sending of unsolicited advertisements to telephone
facsimile machines for which they seek injunctive relief and for each violation
the higher amount of their actual monetary loss or $500. They further allege
unlawful sending of faxed documents without listing certain required
information for which they seek injunctive relief, payment of penalties and
attorney's fees. They also allege that the defendants' actions constituted
unfair competition entitling them to both injunctive relief and additional
damages.
JOHN REMILLARD. On January 8, 1999, the Company received a letter
threatening litigation for counsel for claimant John Remillard. Mr. Remillard
claimed that the Company made misrepresentations and breached duties owed to
him in connection with his decision to sell back stock to the Company in
connection with a June 1998 settlement agreement between Mr.
<PAGE>
Remillard and the Company. On January 15, 1999, the Company, through outside
counsel, responded in writing denying the allegations. No lawsuit has been
filed. The Company intends to defend any claims or litigation which arise
out of this dispute.
As to the foregoing pending or threatened litigation, the ultimate
resolution of these matters is subject to the uncertainties inherent in legal
and administrative proceedings. Accordingly, the Company cannot determine
whether any of these matters will have a material effect on the Company's
results of operation, liquidity or financial condition.
Item 2. CHANGES IN SECURITIES
On January 15, 1999, the Company announced a four-for-one forward split of
its shares of common stock, payable to shareholders of record on February 5,
1999.
The Company's financing activities raised $5,875,250 from the sale of
6,811,304 shares (as adjusted for the four-for-one split on February 5, 1999) of
common stock for the three-month period ended March 31, 1999.. These funds were
raised primarily through the private placement of equity securities in reliance
upon an exemption from registration pursuant to Section 4(2) of the Securities
Act of 1933 and Rule 506 of Regulation D promulgated thereunder. All of these
investors were "Accredited Investors" as that term is defined in Regulation D.
Also during the quarter ended March 31, 1999, the Company received
$170,150 in cash for the exercise of Warrants resulting in the issuance of
7,022,000 shares (as adjusted for the four- for-one split on February 5,
1999) of common stock. The Company also issued 67,267 and has committed to
issue 400,000 shares of common shares to three unrelated persons in exchange
for consulting services valued at $300,715. The Company did not receive any
cash for these shares which were issued in reliance upon an exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933.
Item 5. OTHER INFORMATION
TELEMARKETING CONTRACT
The Company has contracted with an established telemarketing company,
Unlimited Long Distance, Inc., ("ULD"), to conduct a telesales program under
the Company's direction. ULD began training several telemarketers in early
February, 1999. On February 27, 1999, ULD began actual telesale activities.
As of March 31, 1999, as a result of ULD's telesale activities, in excess of
9,000 new customers have subscribed to the Company's long distance service
representing approximately $1.1 million in gross revenues. However, due to the
Company's inability to provide full service to the new customers by March 31,
1999, management has not recognized substantially all of this revenue as of
March 31, 1999. In view of the Company's delay in completing its national
network and providing such services, the Company has elected to re-contact the
customers to confirm their interest in the Company's long distance service.
Assuming such reconfirmation, the resulting revenues will be recorded in April
and May, 1999.
PURCHASE OF TWO PATENTS ON COMPRESSION TECHNOLOGY
<PAGE>
Subsequent to December 31, 1998, the Company reached a preliminary
understanding with Compression Technologies, Inc. ("CTI"), a Texas corporation,
to acquire all of the assets of CTI, primarily in exchange for up to 3,740,000
shares of the Company's common stock (after giving effect to the contemplated
cancellation of CTI shares described below). The only known assets of CTI are
two patents on compression technology that the Company believes have
significant value. Continued development work on the patents is still needed
for their commercial application, which work will be the responsibility of the
Company. In furtherance of such anticipated understanding, and to preserve and
facilitate this corporate opportunity, the Company, in December, 1999,
deposited $900,000, deemed a loan to CTI, in an escrow account with a Texas
attorney to enable CTI to redeem the CTI shares of its shareholders who opted
not to participate in the contemplated transaction. These shares represented
approximately 20% of the then outstanding CTI shares. Currently, Allen J.
Portnoy and William H. Ervine, Jr., the Company's CEO and President,
respectively, and Spencer Kissell, Senior Vice-President, own an aggregate of
13% of the CTI shares prior to the redemption. So as to not realize any profit
from the transaction, they have each agreed that if the transaction is
consummated, they will simultaneously return their CTI shares to CTI for
cancellation without payment or consideration. In addition, Mr. Portnoy has
agreed to provide the Company a "put" whereby on June 30, 2000, the Company, at
its sole discretion, may put the acquired patents to Mr. Portnoy in exchange
for his conveying to the Company the same number of shares of the Company's
common stock as the Company conveyed to CTI for the patents. As of May 4,
1999, Mr. Portnoy beneficially owned 5,537,710 shares representing
approximately 8.89% of the Company's Common Stock. Consummation of the
transaction, which will result in the cancellation of the $900,000 loan from
the Company, is subject to the execution of a definitive Asset Purchase
Agreement. Such Agreement requires the approval of a majority of CTI
shareholders, and approval of the Company's board of directors. Both approvals
were obtained as of May 4, 1999; the final negotiation of the number of shares
of the Company's common stock to be issued to CTI and consummation of the
Agreement is expected to be accomplished by the end of May, 1999.
LETTER OF INTENT FOR MARKETING AND EQUIPMENT LEASING
On April 19, 1999, the Company announced signing a letter of intent with
IntelliNet, L.P., an affiliate of The InterBank Companies ("IntelliNet"), that
will allow IntelliNet to market USA Talks.com's flat-rate long distance service
products nationwide in exchange for IntelliNet providing additional growth
capital to fund the expansion of the Company's national IP. Under the
agreement, IntelliNet's telemarketing group will be initially allocated the
capacity on the Company's network to add up to 100,000 new subscribers per month
by the third quarter, 1999. In addition, IntelliNet will arrange lease financing
of up to $20 million that will be used to facilitate the accelerated build-out
of its national IP network. Closing is expected by the second quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned authorized officer.
<PAGE>
Dated May 14, 1999
USA.Talks.Com, Inc.
/s/ Jack C. Alexander
Chief Financial Officer
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4 - 5
Notes to Consolidated Financial Statements F-6 - 10
</TABLE>
F-1
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,153,425 $ 4,338,438
Accounts receivable 57,387 -
Note receivable - related party 70,000 -
Prepaid expenses and other current assets 421,689 14,422
------------ -----------
Total current assets 1,702,501 4,352,860
FURNITURE AND EQUIPMENT, net 9,665,738 3,166,838
OTHER ASSETS 900,000 900,000
------------ -----------
TOTAL ASSETS $ 12,268,239 $ 8,419,698
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Book overdraft $ 37,419 $ -
Accounts payable 3,733,616 2,466,281
Note payable - related party 1,430 1,430
Contract payable - 59,460
Accrued expenses 115,248 28,412
Convertible promissory notes 2,352,500 2,252,500
------------ -----------
Total current liabilities 6,240,213 4,808,083
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock: $0.001 par value
400,000,000 shares authorized
76,200,219 (unaudited) and 62,299,648 shares
issued and outstanding 76,200 62,300
Common stock committed: $0.001 par value
400,000 (unaudited) and 0 shares
committed but not yet issued 400 -
Additional paid-in capital 19,023,423 12,691,610
Deficit accumulated during the development stage (13,071,997) (9,142,295)
------------ -----------
Total shareholders' equity 6,028,026 3,611,615
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,268,239 $ 8,419,698
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months August 26, 1991
Ended Ended (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- -------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES $ 57,387 - $ 57,387
COST OF SALES 34,256 - 34,256
----------- ----------- ------------
GROSS PROFIT 23,131 - 23,131
----------- ----------- ------------
OPERATING EXPENSES
Selling, general, and administrative 2,164,805 36,322 7,013,015
Research and development 1,068,900 158,039 3,446,041
Salaries and other compensation 557,603 108,973 1,763,390
Legal 156,579 1,000 630,298
----------- ----------- ------------
Total operating expenses 3,947,887 304,334 12,852,744
----------- ----------- ------------
LOSS FROM OPERATIONS (3,924,756) (304,334) (12,829,613)
----------- ----------- ------------
OTHER INCOME (EXPENSE)
Interest income 52,675 - 60,022
Interest expense (56,022) - (110,007)
----------- ----------- ------------
Total other income (expense) (3,347) - (49,985)
----------- ----------- ------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (3,928,103) (304,334) (12,879,598)
PROVISION FOR INCOME TAXES 1,600 - 2,400
----------- ----------- ------------
NET LOSS $(3,929,703) $ (304,334) $(12,881,998)
----------- ----------- ------------
----------- ----------- ------------
BASIC LOSS PER COMMON SHARE $ (0.05) $ (0.01) $ (0.37)
----------- ----------- ------------
----------- ----------- ------------
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 76,226,352 58,275,020 34,470,824
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months August 26, 1991
Ended Ended (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- -------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,929,703) $(304,334) $(12,881,998)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 298,002 - 319,987
Issuance of options and warrants - - 3,340,550
Issuance of stock for services rendered 300,715 - 802,782
Issuance of stock for an option to license
technology - - 50,000
(Increase) decrease in
Accounts receivable (57,387) - (57,387)
Prepaid expenses and other current assets (407,268) (198) (421,610)
Other assets - 198 (900,000)
Increase (decrease) in
Book overdraft 37,419 - 37,419
Accounts payable 1,267,335 (105,460) 3,733,616
Accrued expenses 27,375 - 115,247
----------- --------- ------------
Net cash used in operating activities (2,463,512) (409,794) (5,861,394)
----------- --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (6,796,901) - (9,960,724)
Payment on note receivable - related party (70,000) - (70,000)
----------- --------- ------------
Net cash used in investing activities (6,866,901) - (10,030,724)
----------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable - (7,500) (66,920)
Proceeds from long-term debt 100,000 - 2,528,350
Proceeds from sale of common stock 5,875,250 307,502 14,126,564
Proceeds from capital contribution - - 171,842
Proceeds from sale of warrants - - 115,557
Proceeds from warrants exercised 170,150 - 170,150
----------- --------- ------------
Net cash provided by financing activities 6,145,400 300,002 17,045,543
----------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY) (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Three Months August 26, 1991
Ended Ended (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- -------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents $(3,185,013) $(109,792) $ 1,153,425
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,338,438 112,314 -
----------- --------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,153,425 $ 2,522 $ 1,153,425
----------- --------- ------------
----------- --------- ------------
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During the three months ended March 31, 1999 and 1998 and from August 26,
1991 (inception) to March 31, 1999, the Company paid $1,600 (unaudited), $0
(unaudited), and $1,600 (unaudited), respectively, in income taxes.
During the three months ended March 31, 1999 and 1998 and from August 26, 1991
(inception) to March 31, 1999, the Company paid interest of $56,022 (unaudited),
$0 (unaudited), and $56,022 (unaudited), respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 1999, the Company issued common stock to
vendors for services valued at $300,715.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
USA Talks.com, Inc. (formerly SBB, Inc.) a Nevada corporation, is a
development stage company which adopted its current name on July 29,
1998, following a corporate reorganization between SBB, Inc. and Alfine
Corporation ("Alfine"). Pursuant to the reorganization and plan of
merger, Alfine received 95% of the total issued and outstanding stock of
SBB, Inc. Alfine, a development stage company formed in 1991, had
commenced the development of an Internet-based long distance telephone
network. SBB subsequently changed its name to USA Talks.com, Inc.
For accounting purposes, the transaction has been treated as a
recapitalization of Alfine, with Alfine as the accounting acquirer
(reverse acquisition). The operations of SBB have been included with
those of Alfine from the acquisition date. SBB was incorporated in
Nevada on December 26, 1985 and was a development stage enterprise from
the date of incorporation until its acquisition of Alfine. SBB had no
assets or liabilities at the date of the acquisition and did not have
significant operations prior to the acquisition. Therefore, no pro
forma information is presented.
Alfine was a development stage company formed in 1991 that owned the
exclusive worldwide licensing and marketing rights for its Phonetic
Speech Recognizer. Additionally, Alfine also had developed proprietary
technology for audio compression and speaker
verification/identification.
USA Talks.com, Inc. and subsidiaries (collectively, the "Company") is
publicly-held and is trading through the pink sheets under the symbol
USAT.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles for interim
information and with the instructions to Form 10-QSB and Regulation
S-X. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all normal,
recurring adjustments considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction
with the audited financial statements included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1998. The results
of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of USA
Talks.com, Inc. and its wholly-owned subsidiaries, Alfine Technology, Inc.
and PhonClub International, Inc. All significant intercompany accounts
and transactions have been eliminated.
STOCK SPLIT
On June 12, 1998 and January 15, 1999, the Board of Directors and
shareholders of the Company approved a 2-for-1 and a 4-for-1 stock
split, respectively, of its outstanding common stock. All per share
data presented has been retroactively restated to show the effects of
these stock splits.
REVENUE RECOGNITION
Revenue consists of a one-time non-refundable start-up fee and a
monthly service charge under a month-to-month contract. The start-up
fee is recognized as revenue at the start of the first month of
service. The monthly service charge is recognized as revenue at the
time of billing. Telephone services are provided on a whole-period,
increment basis, with no pro ration of partial periods. The Company
bears all the risk of credit card chargebacks.
F-7
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Deposit for telephone service $292,000 $ -
Refund of NASDAQ filing fee 112,755 -
Other assets 16,934 14,422
-------- -------
TOTAL $421,689 $14,422
-------- -------
-------- -------
</TABLE>
NOTE 4 - OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
Loan receivable in contemplation
of business acquisition $900,000 $ -
Cash held in escrow in contemplation
of business acquisition - 900,000
-------- --------
TOTAL $900,000 $900,000
-------- --------
-------- --------
</TABLE>
Pursuant to an Agreement and Plan of Reorganization between USA
Talks.com, Inc. and Compression Technologies, Inc. ("CTI"), a Texas
corporation, the Company will acquire all of the assets and liabilities
of CTI in exchange for approximately 3,740,000 shares of the Company's
common stock and the forgiveness of the $900,000 loan receivable. Three
of the Company's officers/directors owned an aggregate of 1,056 shares of
CTI, representing approximately 13% of the total issued and outstanding
shares of CTI.
F-8
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - OTHER ASSETS (continued)
As of May 10, 1999, approximately 74% of the holders of CTI's issued and
outstanding shares have approved the reorganization. The only known
assets of CTI are two patents on compression technology that the Company
believes have significant value. There are no known liabilities. To
indemnify the Company from any loss in the value of the patents, the
Board of Directors accepted an offer from the Company's Chief Executive
Officer to purchase the two patents. If the patents are not valued by the
Company at at least the purchase price of $4,500,000 by June 30, 2000, he
will exchange 3,740,000 of his personal shares of common stock for the
patents.
NOTE 5 - NOTE RECEIVABLE - RELATED PARTY
Note receivable - related party at March 31, 1999 is due from an
officer. Principal and interest are due upon demand with interest at
10% per annum and the note is unsecured.
NOTE 6 - CONVERTIBLE PROMISSORY NOTES
The terms associated with each series of convertible promissory notes
and the related amounts raised and converted during the three months
ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Converted Outstanding Outstanding
Raised During as of as of
During March 31, December 31, December 31,
1999 1999 1998 1999
----------- ----------- ------------ -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
10% notes (a) $2,302,500 $2,202,500 $100,000 $ -
9.25% notes (b) 50,000 50,000 - -
---------- ---------- -------- --------
TOTAL $2,352,500 $2,252,500 $100,000 $ -
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
(a) 10% subordinated notes, due October 15, 1999.
(b) 9.25% notes, due December 30, 2001.
F-9
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO MARCH 31, 1999
(UNAUDITED)
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LITIGATION AND INVESTIGATIONS On January 28, 1999, the United States
Securities and Exchange Commission (the "SEC") issued an order directing
a private investigation of the Company. The investigation concerned
whether in connection with an offer for, purchase, or sale of the
Company's securities, certain persons or entities, including the
Company, may have violated the securities laws. The possible violations
included, but were not limited to, making false or misleading statements
of material fact or failing to disclose material facts about the status
and extent of the business operation of the Company. Thereafter, the SEC
temporarily suspended the over-the-counter trading of the securities of
the Company. The temporary suspension was in effect from January 29,
1999 through February 11, 1999. The SEC is currently continuing its
investigation of the Company. Management is not able to predict whether
the outcome of the investigation will be unfavorable to the Company or
not.
The Company is involved with various securities, class action
lawsuits. The complaints allege the Company made false or misleading
statements and omitted to state material facts necessary to make other
representations not misleading concerning the Company's products, their
capabilities, and the roll-out schedule of the products. These
complaints were filed immediately after the SEC temporarily suspended
trading on the Company's stock.
On January 8, 1999, the Company received a letter threatening
litigation from a former officer and shareholder of the company,
alleging the Company made misrepresentations and breached duties owed
him in connection with the Company's purchase of his outstanding stock.
On February 5, 1999, the Company was named as a defendant in a lawsuit
filed by TrendMark, Inc. the United States District Court for the
Western District of Tennessee. The Company has reached certain
tentative agreements with Trendmark to settle this dispute, however a
draft of the Settlement Agreement has not been approved by the Board of
Directors or the Company's attorneys.
Management is not able to predict whether the outcome of any of these
lawsuits will be unfavorable to the Company, nor estimate potential
losses due to them.
F-10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,153,425
<SECURITIES> 0
<RECEIVABLES> 127,387
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,702,501
<PP&E> 9,985,725
<DEPRECIATION> (319,987)
<TOTAL-ASSETS> 12,268,239
<CURRENT-LIABILITIES> 6,240,213
<BONDS> 0
0
0
<COMMON> 19,100,023
<OTHER-SE> (13,071,997)
<TOTAL-LIABILITY-AND-EQUITY> 12,268,239
<SALES> 57,387
<TOTAL-REVENUES> 57,387
<CGS> 34,256
<TOTAL-COSTS> 3,947,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,022
<INCOME-PRETAX> (3,928,103)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,929,703)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
