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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 SEPTEMBER 30, 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 92037
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER
INCLUDING AREA CODE
(858) 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
NOVEMBER 12, 1999 WAS 87,295,899.
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PART 1
ITEM 1 - FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the
Company's management, 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 September 30, 1999, and the results of its
operation and changes in its financial position from January 1, 1999 through
September 30, 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 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 SEPTEMBER 30, 1999, COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1998
USATalks.com, Inc. is a development stage company that had no significant
revenues for its quarter ended September 30, 1999, and had no revenues for
its quarter ended September 30, 1998, as discussed below:
REVENUES
NET REVENUE. For the three months ended September 30, 1999, net
revenue of $149,496 consists of sales of long-distance telephone services on
the first phase of our nationwide voice-over-Internet (VOIP) telephony
network. This initial phase was completed in July, 1999 and was immediately
available for originating calls from local access in over 200 cities and
terminating anywhere in the continental United States.
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COST OF SALES. Cost of sales consists principally of the costs
directly associated with the test marketing conducted. Accordingly, it does
not include costs incurred to establish initial relationships with Internet
Service Providers and local and competitive local exchange carriers, which
are reflected in the accompanying financial statements as part of "Research
and Development" costs.
GROSS PROFIT. Gross profit was $59,865 for the three months ended
September 30, 1999 and zero for the three months ended September 30, 1998
(since there were no sales for the 1998 period).
EXPENSES
Total expenses for the third quarter ended September 30, 1999 were
$5,287,369 as compared to $591,487 for the third quarter ended September 30,
1998. Total expenses for the nine months ended September 30, 1999 were
$14,506,481 as compared to $1,416,200 for the nine months ended September 30,
1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist primarily of (i) telemarketing, (ii) market
development, (iii) trade show expenses, (iv) payroll for sales personnel, (v)
depreciation charges, and (vi) general administrative costs. Selling, general
and administrative expenses were $1,433,945 for the three months ended
September, 1999 and $204,202 for the three months ended September 30, 1998.
The increase in selling, general and administrative expenses is attributable
to the overall expansion of the promotion and marketing of our services. We
expect sales and marketing expenses to increase significantly in total dollar
amounts but to decrease equally significantly as a percentage of revenues as
we endeavor to enhance our market position and brand recognition.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of network telephony costs and consulting fees to establish initial
relationships with Internet Service Providers and local and competitive local
exchange carriers and for consultants who design, implement and operate our
VOIP telephony network. Research and development expenses were $2,797,586 for
the three months ended September 30, 1999 and $222,971 for the three months
ended September 30, 1998. The increase in research and development expenses
is attributable to significant increases in the ongoing deployment and
implementation of our VOIP telephony network and associated costs related to
the completion of the first phase of our build out of our nationwide network.
To date, all research and development costs have been expensed as incurred.
We expect costs for Internet Service Providers and local and competitive
local exchange carriers and for consultants who design, implement and operate
our VOIP telephony network to increase for the foreseeable future as we
continue the build-out of the second phase of our domestic nationwide network
across the Unites States and expand our service area to and additional 200
markets.
SALARIES AND OTHER COMPENSATION. Salaries and other compensation
consist primarily of compensation to a wide variety of staff personnel in
addition to corporate officers and executives. Salaries and other
compensation was $804,617 for the three months ended September 30, 1999 and
$107,264 for the three months ended September 30, 1998. The increase in
salaries and other compensation was primarily due to significant increases in
overall staff from 7 as of September 30, 1998 to 29 as of September 30, 1999.
We expect salaries and other compensation to increase for the remainder of
the year ending December 31, 1999 and for the foreseeable future as we hire
additional personnel to maintain the expansion of our nationwide network.
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LEGAL. Legal expenses consist of attorney fees related to our
ongoing legal requirements including, among others, the SEC investigation and
class action law suits, and mergers and acquisitions. Legal expenses were
$177,783 for the three months ended September 30, 1999 and $55,134 for the
three months ended September 30, 1998. We expect legal expenses to remain at
these levels for the remainder of the year ending December 31, 1999 and for
the foreseeable future thereafter due to our expansion plans and our
inability to determine when the termination of the SEC investigation and
other lawsuits will occur.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was approximately $7.29 million for the
nine months ended September 30, 1999, compared to $1.67 million for the full
year ended December 31, 1998, reflecting a heightened level of activity in
the establishment of relationships with Internet Service Providers and local
and competitive local exchange carriers; and additional expenses associated
with the design, installation and operation of our VOIP telephony network;
and for accelerated efforts in the overall marketing strategies for our
services. Capital expenditures for the nine months ended September 30, 1999
consumed another $5.68 million compared to $3.14 million for the entire 1998
year, substantially all of which for both periods was used for equipment
purchases and installation costs for the build-out of our private national
VOIP network. As of September 30, 1999, approximately $2.18 million in
equipment purchases and installation costs were in accounts payable as
compared to $2.5 million at December 31, 1998, reflecting purchases made from
primary equipment and service suppliers. Cash on hand at September 30, 1999
was $268,647 compared to $4,338,438 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 expansion
of its private VOIP network at the rate of approximately $1.5 million per
month, or up to an additional $4.5 million for the balance of 1999; however,
we could spend up to an additional $8 million under a more accelerated plan
if sufficient funds are available on acceptable terms.
In addition, we 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 expansion prior to
generating revenues in each new geographic area served. We believe that
revenue generation in any particular service area will follow the
commencement 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 expected to be limited as the service is extended to the majority of
customers on a prepaid basis, thereby avoiding slow developing liquidity and
collection issues associated with the build-up of a new customer base.
During the nine months ended September 30, 1999, we completed $9
million in private debt and equity financing as compared to $9 million for
the year ended December 31, 1998. Approximately $15 million in additional
funds is needed for our planned capital investments, budgeted operating
expenses, and debt reduction for the three months from October, 1999 to
December 31, 1999. We anticipate that the required funds will be obtained
through the sale of additional equity securities, debt financing and/or
equipment lease arrangements. However, our ability to raise capital has been
adversely affected by the trading suspension invoked by the SEC from January
29, 1999 through February 12, 1999, and its aftermath, and may be affected by
certain pending class action law suits. The on-going SEC investigation may
further hinder us 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.
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Nevertheless, we believe we 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 profit
margins and strong consumer demand for a low-cost, flat-rate long-distance
telephone service. Furthermore, now that the first phase of our nationwide
network is fully operational, we believe that we will be able to generate
substantial funds from on-going operations to help meet our operating
expenses and capital requirements, expansion, implementation and operation of
our VOIP telephony network for the foreseeable future as we continue the
build out of the second phase of our domestic nationwide network across the
Unites States and expand our service area to and additional 200 markets.
Upon completion of the initial phase of the national network,
completed in July, 1999, the monthly cash requirements for recurring network
costs have been and will continue to 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
There is no assurance that we will be successful in achieving the level of
sales revenues required to provide the funds necessary to maintain on-going
fixed costs.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PENDING OR THREATENED LITIGATION, CLAIMS OR ASSESSMENTS (EXCLUDING UN-ASSERTED
CLAIMS AND ASSESSMENTS):
During the quarter ended September 30, 1999, the following changes
have occurred in the pending legal proceedings as reported for the first and
second quarters ended March 31, 1999 and June 30, 1999:
JAMES V. RIBELLINO, JR., 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 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.
The Company, through its attorneys, has defended all the above class action
suits, collectively consolidated together and referred to as "SECURITIES
LITIGATION--ALL ACTIONS." The defense has been handled in the United States
District Court, Southern District of California in San Diego, California. The
Company has filed, a REPLY MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF
MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT, which motion is scheduled for
a court hearing on November 29, 1999.
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KATHLEEN M. WOOD, INDIVIDUALY AND ON BEHALF OF A CLASS OF OTHERS SIMILARILY
SITUATED AND BARRY B. GAUFMAN, INDIVIDUALLY AND ON BEHALF OF A CLASS OF OTHERS
SIMILARILY SITUATED V. MINOLTA CORPORATION, ET AT. LASC CASE NO. BC 199397,
FILED FEBRUARY 4, 1999.
Subject to court approval, this Case has been settled whereby it is to be
dismissed for a nominal anount of money. The settlement sum is being paid by the
Company's liability insurance carrier, which carrier is also paying all legal
fees and costs incurred by the Company in the defense of the suit.
STEVEN A. ROBERTS, INDIVIDUALLY CASE NO. 815973, FILED OCTOBER 19, 1999.
This case involves a claim for damages for fraud and breach of contract and was
filed against Allen J. Portnoy, individually, and the Company. The claims were
asserted for fraudulent actions in connection with the Company's acquisition of
TriServe Communications, Inc.; breach of contract between the Company and Mr.
Roberts of an Employment Agreement; and for breach of contract of Registration
Rights Agreement between the Company and Mr. Roberts. The aggregate amount of
the asserted damages are stated to be not less than $1,195,250 plus punitive
damages; plus costs of the suit, including reasonable attorney's fee; and such
other relief as the Court may deem just and proper. This action is pending in
the Superior Court of California, County of Orange.
JOHN F. REMILLARD, AN INDIVIDUAL, AND PHILOSOPHERS' STONE, LLC, A WYOMING
LIMITED LIABILITY CORPORATION VS. USA TALKS.COM, INC. ET AL. CASE NO. GIC
735115, FILED SEPTEMBER 4, 1999.
The Company has knowledge that this action was filed in the Superior Court of
California, County of San Diego, but service of the complaint has not occurred.
This case involves alleged breach of fiduciary responsibilities; fraud in
securing a previous Compromise and Settlement Agreement; fraud in obtaining
Plaintiff's shares in USA Talks.com, Inc.; and violation of California
Corporations Code Sections 25401, 25402 and 17200. The damages sought include
punitive damages; costs incurred in the suit; rescission of the previous
Compromise and Settlement Agreement; the return of Plaintiff's shares previously
sold.; and further relief as the Court deems just and proper, including interest
on any sums awarded.
As of November 15, 1999, subject to a definitive agreement being negotiated and
agreed upon by the parties to the action, including the Company's Board of
Directors, a tentative Memorandum of Agreement has been reached. Under that
Memorandum of Agreement, among other provisions, this case will be dismissed
with prejudice. Additional information regarding the tentative Memorandum of
Agreement is included herein under Part II, Item 2.
ROHINTON ARESH, AN INDIVIDUAL VS. USA TALKS.COM. INC., CASE NO. 815108, FILED
SEPTEMBER 29, 1999,
This case was filed in the Superior Court of California, County of Orange. The
complaint was served at the end of October, 1999. No response of pleadings has
yet been filed by the Company. The claim is for involves for rescission of the
purchase by Mr. Aresh of the Compayn's common stock and for breach of contract
and fraud related to that same purchase. The damages sought are $25,000,
interest thereon, exemplary damages; recovery of the costs incurred of the suit;
and such further relief as the Court deems appropriate.
REAL NET PARTNERS, L.P. V. USA TALKS.COM, INC.
This is a claim for rescission of the purchase by Real Net Partners, L.P. of the
Company's common stock in the amounts of $305,000 and $75,600. The claim is
based upon unspecified alleged material misrepresentations.
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DIGITAL RIVER, INC. V. USA TALKS.COM, INC.
This is a claim for an aggregate total of unpaid invoices in the amount of
$63,820 for services rendered from July, 1999, to September, 1999.
GAGE MARKETING SERVICES V. USA TALKS.COM, INC.
This is a claim for an aggregate of total unpaid invoices in the amount of
$67,881.28 for services rendered from July, 1999, to September, 1999.
BURTON N. DANET, AN INDIVIDUAL V. USA TALKS.COM, INC.
This is a threatened claim for an unspecified amount of money for unpaid
commissions, and breach of contract due to nonpayment of compensation provided
for in a consulting agreement.
INNOVATIVE MANAGEMENT GROUP V. USA TALKS.COM, INC.
This is a claim for an aggregate total of unpaid services rendered from March,
1999, to July, 1999, in the amount of $435,594.73.
TELTRUST SERVICES, INC. V. USA TALKS.COM, INC.
This is a claim for an aggregate total of unpaid services rendered from March
29, 1999, to July 9, 1999, in the amount of $161,748.14.
IFC CREDIT CORPORATION V. USA TALKS.COM, INC.
On October 15, 1999, IFC Credit Corporation advised the Company of Notice of
Acceleration under the provisions of two Equipment Lease Agreements dated May
29, 1999. IFC also advised the Company of the termination of the Lease Agreement
and made demand for the alleged balance of $355,000 due under both Lease
Agreements. Return of all the leased equipment has been demanded.
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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.
Our financing activities for the nine months ended September 30,
1999, we raised $6,322,916 from the sale of 7,004,997 shares (as adjusted for
the four-for-one split on February 5, 1999) of common stock. We were also
successful in converting subordinated promissory notes, plus accrued
interest, into 2,363 shares of common stock These funds were raised 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.
In addition, during the nine months ended September 30, 1999, we
received $174,440 in cash for the sale and exercise of Warrants resulting in
the issuance of 7,224,137 shares (as adjusted for the four- for-one split on
February 5, 1999) of common stock. We also issued 3,189,069 shares of common
shares to various unrelated persons in exchange for consulting services
valued at $2,273,394. We 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.
TRISERVE COMMUNICATIONS, INC. ACQUISITION
Pursuant to an Agreement and Plan of Merger and Reorganization
between USA Talks.com, Inc. and TriServe Communications, Inc., ("TriServe"),
a California corporation, effective June 14, 1999, the Company acquired all
of the shares of TriServe for 2,223,144 shares of the Company's common stock,
representing 2.70% of the outstanding shares of the Company after the
acquisition. The transaction was valued on the Company's books at $1,875,778.
The excess of consideration over the fair value of net assets acquired
(goodwill) was valued at $1,848,011 and is being amortized on a straight-line
basis over an estimated useful life of 5 years.
TriServe has acted as a significant facilitator to the Company in
the design, implementation and management of the Company's nationwide Voice
Over IP Telephony network. TriServe's founders have extensive
telecommunications industry experience and important relationships with
telecommunications equipment manufacturers and local and competitive local
exchange carriers throughout the United States.
TRENDMARK, INC. ASSET PURCHASE AGREEMENT
On February 5, 1999, 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. The Company reached an agreement to settle the
lawsuit as originally filed. The resulting agreement effective July 16, 1999,
was an Asset Purchase Agreement under which the Company issued 2,000,000
shares of its common stock for the acquisition of all the net assets of
TrendMark, Inc. In addition, the agreement required the Company to loan
TrendMark, Inc. the sum of $150,000 by September 30, 1999. As security for
repayment of this loan, TrendMark, Inc. has pledged 93,750 shares of the
2,000,000 shares they received in the transaction. As of September 30, 1999
the Company has loaned TrendMark, Inc. the sum of $45,276 which is to be
applied against the $150,000 loan. Repayment of the loan is due by June 30,
2000.
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TOTAL COMMUNICATIONS PLUS, INC.
On July 24, 1999 the Company entered into a Letter of Intent for the acquisition
of all of the issued and outstanding stock of Total Communications Plus, Inc.
("TCP") TCP is a Maryland based company which markets their services through
utility companies and offers a flat-rate-per-call service to approximately
30,000 users This original Letter of Intent was superseded by another Letter of
Intent dated August 19, 1999. As of November 15, 1999, no definitive Purchase
Agreement has been executed as contemplated by the Letters of Intent, and there
is no assurance that this proposed transaction will be consummated.
TCIPNET, LIMITED
In July, 1999, the Company entered into an Agreement to purchase an
eighty-percent interest in TCIPNet, Limited ("TCIP"), a United Kingdom
corporation that owns telephone operating rights and contracts throughout the
United Kingdom. All documents necessary and appropriate for consummating this
transaction were executed by the Company on August 4, 1999, and 300,000 shares
of the Company's common stock, were placed in escrow with the International Law
Firm of Sinclair Roche & Temperley to be held until closing. In addition to the
300,000 shares of stock, we are also to provide certain funding of between
$400,000 and $750,000 for TCIP, due at closing, as part of the total purchase
price. As of November 15, 1999, the closing of this transaction has not
occurred, and there is no assurance that a closing will occur.
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GLOBAL TALKS NETWORK.COM, INC.
On September 3, 1999, Global Talks Network.com, Inc. ("GTN") agreed to purchase
1,250,000 shares of common stock of the Company at a price of $2.00 per share,
and entered into a stock subscription agreement with the Company for those
shares. The stock will be issued to GTN in increments of 416,666, 416,667 and
416,667, but the Company will hold the stock Certificates until GTN has paid for
the shares represented by each Certificate. All stock will be paid for on or
before 90 days from date the subscription agreement was signed. Any shares
represented by such Certificate that has not been paid for after 90 days will be
cancelled. As of September 30, 1999 the Company has received $516,666 towards
the subscription amount of $2,500,000 and has recorded a stock subscription
receivable of $1,983,334.
ROGER REMILLARD
On August 18, 1999, the Company and Roger Remillard entered into a consulting
agreement effective January 1, 1999. Under the terms of the consulting
agreement, Mr. Remillard assigned to the Company all his interests in certain
intellectual property rights to a music transmission capability using IP
protocol developed by him. The Company will make an application for one or more
patents covering this technology, to be owned exclusively by the Company. In
addition, Mr. Remillard also assigned to the Company his intellectual property
rights for a partially developed "black box" which the Company is developing for
direct digital transmission using IP protocol from the origin to the
destination. Finally, under the Consulting Agreement Mr. Remillard is to provide
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exclusive consulting services to the Company for the calendar year 1999, and
thereafter until terminated by 30 days' written notice by either party. In
consideration for the foregoing, the Company agreed to pay Mr. Remillard
$937,500 in consulting fees. Mr. Remillard was given the right to convert that
amount to shares of the Company's common stock based upon the market value of
the Company's shares at the date of exercising those rights. On August 20, 1999,
the Company filed a Form S-8 with the Securities and Exchange Commission to
register the 1,500,000 shares.
JOHN F. REMILLARD
As of November 15, 1999, the Company has entered into a tentative Agreement of
Understanding with John F. Remillard under which a formal complaint filed by him
on September 4, 1999 will be dismissed, with prejudice. In addition, in
consideration of Patent rights to patent rights insignificant compression
technology with a fair market value of not less than $4,000,000, the Company is
to provide Mr. Remillard with a multi-year employment, including the grant of an
Employee Incentive Stock Option for 12,000,000 million shares. Such Agreement of
Understanding will include provisions for certain performance milestones by
Remillard prior to vesting of the stock options, and ownership by the Company of
all intellectual properties developed by Remillard. The terms of the agreement
are to be negotiated and agreed upon, including the Company's Board of
Directors.
MITCHELL, SILBERBERG & KNUPP LLP
The Company and the law firm of Mitchell, Silberberg & Knupp LLP ("MSK") have
reached a tentative agreement under which the Company will issue Warrants to MSK
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to purchase 1,000,000 of its unregistered Common Stock with an exercise price of
$0.375 (thirty seven and one-half cents) in exchange for the consideration of
the deferment of payment of all unpaid legal fees and costs, and the continued
representation by MSK until November 30, 1999.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES
"Year 2000 Issues" refer generally to the problems that some
software may have in determining the correct century for the year. For
example, software with date-sensitive functions that is not Year 2000
compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results. We have
defined Year 2000 compliant as the ability to:
1. Correctly handle date information needed for the December 31,
1999 to January 1, 2000 date change.
2. Function according to the product documentation provided for
this date change, without changes in operation resulting from
the advent of a new century, assuming correct configuration.
3. Respond to two-digit date input in a way that resolves the
ambiguity as to century in a disclosed, defined and
predetermined manner.
4. Store and provide output of date information in ways that are
unambiguous as to century if the date elements in interfaces
and data storage specify the century.
5. Recognize the Year 2000 as a leap year.
We designed our current products to be Year 2000 compliant when
configured and used in accordance with the related documentation, and
provided that the underlying operating system of the host machine and any
other software used with or in the host machine or our products are Year 2000
compliant. However, we have not tested our products for Year 2000 compliance.
We continue to respond to customer questions about prior versions of our
products on a case-by-case basis.
We have not tested software obtained from third parties. However, we
are seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite assurances from developers of products incorporated into
our products, our products may contain undetected errors or defects
associated with Year 2000 date functions. Known or unknown errors or defects
in our products could result in delay or loss of revenues, diversion of
development resources, damage to our reputation, or increased service and
warranty costs, any of which could seriously harm our business, financial
condition and results of operations. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues, and we are
aware of such lawsuits against other software vendors. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent we may be affected by it.
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We are assessing our material internal information technology
systems, including both our own software products and third-party software
and hardware technology, but we have not initiated an assessment of our
non-information technology systems. We expect to complete testing of our
information technology systems in 1999. To the extent that we are not able to
test the technology provided by third-party vendors, we are seeking
assurances from such vendors that their systems are Year 2000 compliant.
We are not currently aware of any significant operational issues or
costs associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may
experience significant unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information
technology and non-information technology systems.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are
not Year 2000 compliant, they may experience material costs to remedy
problems, they may face litigation costs and they may delay purchases or
implementation of our products. Year 2000 issues could reduce or eliminate
the budgets that current or potential customers could have for purchases of
our products and services. As a result, our business, financial condition and
results of operations could be seriously harmed.
We have not directly funded our Year 2000 plan from cash balances
and have not separately accounted for these costs in the past. To date, these
costs have not been significant. We may incur additional costs related to the
Year 2000 plan for administrative personnel to manage the project, outside
contractor assistance, technical support for our products, product
engineering and customer satisfaction. In addition, we may experience
material problems and costs with Year 2000 compliance that could seriously
harm our business, financial condition and results of operations.
We have not yet fully developed a contingency plan to address
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. The cost of developing and implementing such a plan
may itself be significant. Finally, we are also subject to external forces
that could seriously harm our business, financial condition and results of
operations.
PURCHASE OF TWO PATENTS ON COMPRESSION TECHNOLOGY
In December, 1998, we advanced the sum of $900,000 to Compression
Technologies, Inc. ("CTI") in connection with the purchase of two patents on
compression technology. Subsequent to December, 1998 we entered into an Asset
Purchase Agreement, subject to the approval of our Board of Directors, with
CTI under which we would acquire the two patents in exchange for a specified
number of shares of our common stock and the forgiveness of the $900,000
loan. Our Board of Directors wishes to acquire the two patents, but, due to
certain possible conflicts of interest with Allen J. Portnoy, CEO, William H.
Ervine, Jr., former President, and Spencer Kissell, Vice President, the Board
of Directors is negotiating with the referenced persons in order to ensure
the shareholders that there will be no dilution of shareholder interest. As
of August 15, 1999, the negotiations have not been completed.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
-8-
<PAGE>
USA TALKS.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 268,647 $ 4,338,438
Accounts receivable 103,680 -
Notes receivable - related parties 94,434 -
Stock subscription receivable 1,983,334 -
Prepaid expenses and other current assets 962,662 14,422
----------- -----------
Total current assets $ 3,412,757 $ 4,352,860
Furniture and equipment, net 7,711,100 3,166,838
Other assets 832,368 900,000
Intangibles, net 5,069,710 -
----------- -----------
Total assets $17,025,935 $ 8,419,698
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,455,940 $ 2,466,281
Note payable - related party - 1,430
Contract payable - 59,460
Accrued expenses 424,633 28,412
Lease payable - current portion 143,960 -
Convertible promissory notes 1,185,000 2,252,500
Notes payable 750,000 -
----------- -----------
Total current liabilities $ 8,959,533 $ 4,808,083
----------- -----------
Long-term debt:
Lease payable - net of current portion $ 125,623 -
Convertible promissory notes 520,000 -
----------- -----------
Total long-term liabilities $ 645,623 -
----------- -----------
Total liabilities $ 9,605,156 $ 4,808,083
----------- -----------
Shareholders' equity:
Preferred stock, $0.001 par value, 7,000 shares authorized, $ 1 $ -
600 (unaudited) and nil shares issued and outstanding as
Series A convertible preferred stock at September 30, 1999 and
December 31, 1998, respectively (Note 12)
Common stock, $0.001 par value, 200,000,000 shares authorized, 87,295,899
(unaudited) and 62,299,648 shares issued and outstanding at September
30, 1999 and December 31, 1998,
respectively 87,296 62,300
Additional paid-in capital 30,873,488 12,691,610
Deficit accumulated during development stage (23,540,006) (9,142,295)
----------- -----------
Total shareholders' equity $ 7,420,779 $ 3,611,615
----------- -----------
Total liabilities and shareholders' equity $17,025,935 $ 8,419,698
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
USA TALKS.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE AUG 26, 1991
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED (INCEPTION) TO
SEPT 30, 1999 SEPT 30, 1998 SEPT 30, 1999 SEPT 30, 1998 SEPT 30, 1999
------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues $ 149,496 - $ 272,504 - $ 272,504
Cost of sales 89,631 - 163,734 - 163,734
------------------------------------------------------------------------------
Gross profit $ 59,865 - $ 108,770 - $ 108,770
------------------------------------------------------------------------------
Operating expenses
Selling, general and administrative $ 1,433,945 $ 204,202 $ 5,059,792 $ 281,124 $ 10,293,681
Research and development 2,797,586 222,971 6,599,227 761,748 8,642,840
Salaries and other compensation 804,617 107,264 2,051,390 224,433 3,257,178
Legal 177,783 55,134 673,220 145,909 1,094,788
------------------------------------------------------------------------------
Total operating expenses $ 5,213,931 $ 589,571 $ 14,383,629 $ 1,413,214 $ 23,288,487
------------------------------------------------------------------------------
Loss from Operations $(5,154,066) $ (589,571) $(14,274,859) $(1,413,214) $(23,179,717)
------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income $ 2,522 $ - $ 55,896 $ - $ 63,244
Interest expense (75,960) (1,916) (177,148) (2,986) (231,133)
------------------------------------------------------------------------------
Total other income (expense) $ (73,438) $ (1,916) $ (121,252) $ (2,986) $ (167,889)
------------------------------------------------------------------------------
Net loss before provision for income tax $(5,227,504) $ (591,487) $(14,396,111) $(1,416,200) $(23,347,606)
Provision for income tax - - 1,600 - 2,400
------------------------------------------------------------------------------
Net loss $(5,227,504) $ (591,487) $(14,397,711) $(1,416,200) $(23,350,006)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Basic loss per common share $ (0.06) $ (0.01) $ (0.18) $ (0.03) $ (0.62)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Average common shares outstanding 85,234,058 44,919,360 79,672,138 52,270,668 37,437,027
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
F-2
<PAGE>
USA TALKS.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE AUG 26, 1991
MONTHS ENDED MONTHS ENDED (INCEPTION) TO
SEPT 30, 1999 SEPT 30, 1998 SEPT 30, 1999
------------- ------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period $ (14,397,711) $ (1,416,200) $ (23,350,006)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,132,106 8,950 1,154,091
Amortization of goodwill 299,624 - 299,624
Issuance of options and warrants - - 3,340,550
Issuance of stock for services rendered 2,273,393 289,646 2,775,460
Issuance of stock for an option to license technology - - 50,000
Issuance of stock for interest on converted
promissory notes 58,264 - 58,264
(Increase) decrease in:
Accounts receivable (103,680) (103,680)
Prepaid expenses and other current assets (948,240) (4,382) (962,582)
Other assets 67,632 198 (832,368)
Increase (decrease) in:
Accounts payable 3,989,659 54,683 6,455,940
Accrued expenses 336,761 49,451 424,633
------------- ------------- --------------
Net cash used in operating activities $ (7,292,192) $ (1,017,654) $ (10,690,074)
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment $ (5,676,368) $ ($5,705) $ (8,840,191)
Payment on note receivable - related parties (95,864) - (95,864)
Cash acquired from TriServe merger 6,444 - 6,444
------------- ------------- --------------
Net cash used in investing activities $ (5,765,788) $ (5,705) $ (8,929,611)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable $ - $ (111,182) $ (66,920)
Proceeds from long-term debt 871,250 20,000 3,299,600
Proceeds from sale of common stock 6,322,916 1,022,127 14,574,230
Proceeds from sale of preferred stock 600,000 - 600,000
Proceeds from capital contribution - - 171,842
Proceeds from sale of warrants 1,090 10,000 116,647
Proceeds from warrants exercised 173,350 - 173,350
Proceeds from short-term debt 750,000 - 750,000
Proceeds from lease, net of repayment 269,583 - 269,583
------------- ------------- --------------
Net cash provided by financing activities $ 8,988,189 $ 940,945 $ 19,888,332
------------- ------------- --------------
Net increase (decrease) in cash $ (4,069,791) $ (82,414) $ 268,647
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,338,438 112,314 -
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 268,647 $ 29,900 $ 268,647
------------- ------------- --------------
------------- ------------- --------------
</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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO
SEPTEMBER 30, 1999 (UNAUDITED)
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
USA Talks.com, Inc. was originally incorporated in Delaware on August
26, 1991 under the name Alfine Corporation ("Alfine") and began
operating a business based upon that company's services. In July 1998,
in a share exchange agreement, all of the common stock of the Delaware
corporation was acquired by SBB, Inc. ("SBB"), a Nevada corporation. In
the share exchange agreement, 1.29 shares of common stock of SBB were
received by each of the shareholders of Alfine for each share held,
representing 95% of the outstanding common stock of SBB. In connection
with the share-exchange, all of the assets of SBB were transferred out
of the corporation to the former shareholders, providing Alfine with a
"clean shell." 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 on the NASDAQ pink sheets under the
symbol USAT.
F-4
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO
SEPTEMBER 30, 1999 (UNAUDITED)
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 nine months ended September 30, 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., PhonClub International, Inc. and TriServe Communications, Inc.
All significant intercompany accounts and transactions have been
eliminated.
STOCK SPLIT
On June 12, 1998 and January 21, 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
Recurring revenues consists of monthly fees charged to customers for
unlimited, flat rate, long distance service and are recognized over the
period services are provided. Other revenues generally represent
one-time non-refundable registration fees. Such fees are recorded as
earned. The Company bears all risk of credit card chargebacks.
NOTE 3 - TRISERVE COMMUNICATIONS, INC. MERGER
Pursuant to an Agreement and Plan of Merger and Reorganization between
USA Talks.com, Inc. and TriServe Communications, Inc., ("TriServe"), a
California corporation, effective June 14, 1999, the Company acquired
all of the shares of TriServe through a merger transaction in which the
consideration for TriServe's shares was 2,223,144 shares of the
Company's common stock, representing 2.70% of the outstanding shares of
the Company after acquisition. The transaction was valued on the
Company's books at $1,875,778. The excess of consideration over the
fair value of net assets acquired (goodwill) is valued at $1,869,334
and is being amortized on a straight-line basis over an estimated
useful life of 5 years.
TriServe has acted as a significant facilitator to the Company in the
design, implementation and management of the Company's nationwide Voice
Over IP Telephony network. TriServe's founders have extensive
telecommunications industry experience and important relationships with
telecommunications equipment manufacturers and local and competitive
local exchange carriers throughout the United States.
F-5
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)
AND FOR THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO
SEPTEMBER 30, 1999 (UNAUDITED)
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable - related parties at September 30, 1999 are due from
officers. Principal and interest are due upon demand with interest at
10% per annum and the notes are unsecured.
NOTE 5 - STOCK SUBSCRIPTION RECEIVABLE
On September 3, 1999 Global Talks Network.com, Inc. ("GTN") tendered a
subscription to purchase 1,250,000 shares of common stock of USA
Talks.com, Inc. at a price of $2.00 per share. The stock will be issued
to GTN in increments of 416,666, 416,667 and 416,667. The Company will
hold the stock Certificates until GTN has paid for the shares
represented by each Certificate. All stock will be paid for on or
before 90 days from date of subscription agreement. Any shares
represented by such Certificate that has not been paid for after 90
days will be cancelled. As of September 30, 1999 the Company has
received $516,666 towards the subscription amount of $2,500,000 and has
recorded a stock subscription receivable of $1,983,334.
NOTE 6 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,1999 DECEMBER 31, 1998
----------------- -----------------
(unaudited)
<S> <C> <C>
Deposit for local exchange carriers $841,719 $ -
Note receivable - TrendMark, Inc. 45,276 -
Other assets 75,667 14,422
-------- -------
TOTAL $962,662 $14,422
======== =======
</TABLE>
NOTE 7 - OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,1999 DECEMBER 31, 1998
----------------- -----------------
(unaudited)
<S> <C> <C>
Note receivable (Note 5) $832,368 $900,000
-------- --------
TOTAL $832,368 $900,000
======== ========
</TABLE>
F-6
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and September 30, 1999 (unaudited)
and for the Period from August 26, 1991 (Inception) to
September 30, 1999 (unaudited) and for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
- -------------------------------------------------------------------------------
NOTE 8 - INTANGIBLE ASSET
Intangible asset consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,1999 DECEMBER 31, 1998
----------------- -----------------
(unaudited)
<S> <C> <C>
Goodwill (Notes 3 and 13) $ 4,669,334 $ -
Right to Agent/Distributor List 350,000 -
Intellectual Property Rights 350,000 -
----------------- -----------------
5,369,334 -
Less accumulated amortization (299,624) -
----------------- -----------------
TOTAL $ 5,069,710 $ -
----------------- -----------------
----------------- -----------------
</TABLE>
NOTE 9 - SHORT-TERM CONVERTIBLE PROMISSORY NOTES
The terms associated with each series of convertible promissory notes
and the related amounts raised and converted during the nine months
ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Outstanding Outstanding
as of Raised Converted as of
December 31, During During September 30,
1998 1999 1999 1999
------------ ----------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
10% notes a $ 2,202,500 $ 301,250 $ 1,418,750 $ 1,085,000
9.5% notes b - 100,000 0 100,000
------------ ----------- ----------- -------------
TOTAL $ 2,202,500 $ 401,250 $ 1,418,750 $ 1,185,000
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
</TABLE>
a 10% subordinated notes, due November 15, 1999.
b 9.5% collateralized notes, due on demand.
F-7
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and September 30, 1999 (unaudited)
and for the Period from August 26, 1991 (Inception) to
September 30, 1999 (unaudited) and for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
- -------------------------------------------------------------------------------
NOTE 10 - NOTES PAYABLE
In May and June of 1999, the Company issued 14% and 15% Promissory
Notes aggregating $250,000, secured by a portion of the Company's
network equipment. These notes became due three months from date of
issue, and are all now demand notes.
In July 1999, the Company issued a 10% Promissory Note for $500,000.
This note becomes due on January 15, 2000, is unsecured and contains a
personal guaranty of an officer of the Company.
NOTE 11 - LONG-TERM CONVERTIBLE PROMISSORY NOTES
The terms associated with each series of convertible promissory notes
and the related amounts raised and converted during the nine months
ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Outstanding Outstanding
as of Raised Converted as of
December 31, During During September 30,
1998 1999 1999 1999
------------ ----------- ----------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
9.25% notes a $ - $ 250,000 $ - $ 250,000
9.25% notes b 50,000 - - 50,000
9.5% notes c - 220,000 - 220,000
------------ ----------- ----------- -------------
TOTAL $ 50,000 $ 470,000 $ - $ 520,000
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
</TABLE>
a 9.25% notes, due February 1, 2001
b 9.25% notes, due December 30, 2001.
c 9.5% collateralized notes, due between June 23, 2001
and September 30, 2001.
NOTE 12 - CONVERTIBLE PREFERRED STOCK
In August, 1999, the Company issued 600 shares of Series A Convertible
Preferred Stock. These preferred shares do not bear dividends. The
conversion rate into common stock includes a 6% premium and is the
lower of $2.00 or the average market price for the Common Stock for the
five consecutive days immediately preceding the conversion date.
F-8
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and September 30, 1999 (unaudited)
and for the Period from August 26, 1991 (Inception) to
September 30, 1999 (unaudited) and for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
- -------------------------------------------------------------------------------
NOTE 13 - TRENDMARK, INC.
On February 5, 1999, 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. The Company reached an agreement to
settle the lawsuit as originally filed. The resulting agreement,
effective July 16, 1999, was an Asset Purchase Agreement under which
the Company issued 2,000,000 shares of its common stock for the
acquisition of all of the net assets of TrendMark, Inc. The transaction
was valued on the Company's books at $3,500,000. The excess of
consideration over the fair value of net assets acquired (goodwill) is
valued at $2,800,000 and is being amortized on a straight-line basis
over an estimated useful life of 5 years. In addition, the agreement
required the Company to loan TrendMark, Inc. the sum of $150,000. As
security for repayment of this loan, TrendMark, Inc. pledged 93,750
shares of the 2,000,000 shares they received in the transaction. As of
September 30, 1999 the Company had loaned TrendMark, Inc. the sum of
$45,276 (Note 6).
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LITIGATION AND INVESTIGATIONS
On January 28, 1999, the United States Securities and Exchange
Commission ("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.
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. 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.
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.
F-9
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and September 30, 1999 (unaudited)
and for the Period from August 26, 1991 (Inception) to
September 30, 1999 (unaudited) and for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
- -------------------------------------------------------------------------------
NOTE 15 - SUBSEQUENT EVENTS
On November 10, 1999, the Company returned unused network equipment to
Franklin Telecom, which was recorded in Furniture & Equipment and
Accounts Payable for $2,327,400. The actual amount of the credit to be
received is currently being negotiated with Franklin.
F-10
<PAGE>
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.
Dated November 15, 1999 USA.Talks.Com, Inc.
/s/ Jack C. Alexander
---------------------
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 268,647
<SECURITIES> 0
<RECEIVABLES> 103,680
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,412,757
<PP&E> 7,711,100
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,025,935
<CURRENT-LIABILITIES> 8,959,533
<BONDS> 0
0
1
<COMMON> 30,960,784
<OTHER-SE> (23,540,006)
<TOTAL-LIABILITY-AND-EQUITY> 17,025,935
<SALES> 149,496
<TOTAL-REVENUES> 149,496
<CGS> 89,631
<TOTAL-COSTS> 89,631
<OTHER-EXPENSES> 5,213,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,438
<INCOME-PRETAX> (5,227,504)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,227,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,227,504)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
