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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-2474-LA
USA TALKS.COM, INC.
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NEVADA 93-0915593
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
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4180 La Jolla Village Drive, Suite 570 La Jolla, California 92037
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(Address of principal executive offices, including zip code)
Registrant's Telephone Number, Including Area Code: (619)546-0550
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Common Stock, $0.001 Par Value
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |x| No
| |
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. | |
State issuer's revenues for its most recent fiscal year : NONE
The approximate aggregate market value of the registrant's common stock, held by
non-affiliates of the registrant (based on the closing sales price of the Common
Stock as reported on the Over The Counter Bulletin Board on March 26, 1999, was
$303,752,507, excluding shares of common stock held by directors, officers
and each person who holds
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5% or more of the outstanding shares of common stock, since such persons may
be deemed to be affiliates of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of March 26, 1999, 76,632,219 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE [IF INCORPORATING]
DOCUMENT FORM 10-KSB REFERENCE
N/A N/A
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ITEM 2. ANNUAL REPORT ON FORM 10-KSB
a. TABLE OF CONTENTS
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PART I
Item 1. DESCRIPTION OF BUSINESS.........................................................................
Item 2. DESCRIPTION OF PROPERTIES.......................................................................
Item 3. LEGAL PROCEEDINGS...............................................................................
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................................................
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................
Item 7. FINANCIAL STATEMENTS............................................................................
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................................
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.....................................
Item 10. EXECUTIVE COMPENSATION..........................................................................
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................................................
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................
Item 13. EXHIBITS AND REPORTS 0N FORM 8-K................................................................
SIGNATURES
EXHIBIT INDEX
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Except for the historical information presented, the matters discussed in this
Report include forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed under the
caption "Business Risks" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
USA Talks.com, Inc. (formerly SBB, Inc.), a Nevada corporation
(together with its subsidiaries, the "Company"), 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. In addition, Alfine holds the exclusive worldwide
licensing rights for its Phonetic Speech Recognizer-TM- and Speaker
Verification/Identification-TM-, as well as for certain audio compression
technology.
USA Talks.com's strategic objective is to market maintainable "toll
quality" long distance telephone service for a flat monthly rate utilizing
Internet Protocol ("IP") technology. The Company is building its own private IP
network ("Inratranet") to implement its Voice-Over-Internet Protocol ("VOIP").
The Company's Intranet is a private network that acts like a dedicated
circuit, but actually shares the circuit with multiple users and eliminates
in large part the need for expensive (to install, maintain and use)
fixed-to-point hard-wired private lines and switches. The USA Talks.coms
Intranet is comprised of programmed software, not hard-wired circuits, which
results in significant cost savings and a more flexible system for the
transmission of information, including voice, video, data and fax.
USA Talks.com commenced its marketing efforts in late February,
1999, and its prospective customers include small and large businesses and
residential users, and resellers (customers who purchase the service at a
reduced price and remarket it). USA Talks.com's nationwide network, expected
to be completed by mid-1999, will provide high quality, easy-to-use
Internet-based long distance telecommunications service offering unlimited
use for a flat monthly rate. The technologies employed by the Company allow
its customers to make telephone-to-telephone calls using simple, fast call
placement with their existing telephone equipment or special software--no
computer equipment is required.
Operation of the network requires the installation of specialized
equipment to be strategically located at sites selected to serve certain
telephone markets. Such sites are known as Points of Presence ("POPs"). Those
POPs serving broader geographical areas are referred to as "Super POPs". During
the last half of 1998, the Company developed the California portion of its
network through the installation of four POPs located as follows: San Diego
(serving the greater San Diego area); Irvine (serving Orange County and the
greater Los Angeles metropolitan area), San Jose (serving the greater San
Francisco and San Jose area); and Sacramento (serving the greater Sacramento
area).
Presently, the Company is in the process of installing five Super
POPs to enable it to offer nationwide service. These five Super POPs are
being located as follows: Houston (serving several south-central states):
Atlanta (serving the southeastern United States, except Florida); Tampa
(serving the State of Florida); New York
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(serving the northeastern United States); and Chicago (serving the central
United States). These Super POPs will service both out-bound (destination)
and in-bound (origination) calls. Upon installation of the five Super POPs,
it is anticipated that approximately 80% of the population of the continental
United States will be able to make a long distance telephone call to anywhere
within the continental United States by mid-1999.
USA Talks.com has contracts with Williams Co. to provide fixed-cost
Internet service between POPs. The Company also has contracts with certain
competitive local exchange carriers ("CLECs") to deliver calls to the
destination telephone and to allow for overflow traffic when needed.
THE COMPANY'S TECHNOLOGY
INTERNET BACKGROUND
The Internet is a worldwide array of computers electronically linked
with millions of public computer networks and private computers.
Originally, the Internet was developed by government agencies for the
transmission of encripted information, and later evolved into use by academic
institutions to exchange data, publish research, and send and receive e-mail.
In today's world, the wide-spread proliferation of personal computers with
easy-to-use communication devices; the availability of user-friendly
interface software; and the ever-expanding accessibility of more diverse
worldwide networks, combine to allow heretofore inexperienced users to access
the Internet with ease, thus producing rapid growth in the number of
Internet users. The Internet, coupled with computer-driven graphics and
creative multimedia capabilities, has become the new mass communications
medium that has emerged into the "World Wide Web." In addition, the reduced
cost of communicating over the Internet provides individuals and
organizations with a new means to educate, exchange ideas, and conduct
business.
TELECOMMUNICATIONS AND THE INTERNET
Traditional telephone networks, known as the Public Switched Telephone
Network ("PTSN"), are circuit-switched networks that have been optimized for
real-time voice communications with a maintainable high quality standard for
long-distance calls, referred to as "toll quality," for sound transmitted by
analog signals. As a telephone call is initiated, the dedicated hard-wired
circuit is established between the calling party and the destination party.
This type of call requires a dedicated hard-wired circuit and bandwidth to
provide the electronic impulses making up the analog signal and to allow them
to follow in a linear sequence, much like automotive traffic on a single lane
road. When using IP, the transmitted signal is a digital signal made up of
compressed individual data packets, each directed to the same destination,
but not necessarily following one another, nor taking the same route. This
technology makes more efficient use of the bandwidth to transmit multiple
calls and is much less capital intensive, thus allowing an Internet Service
Provider ("ISP") to transmit calls at much lower costs than regular PSTN
telephone calls.
The Internet is a communications network that has historically been
used for applications where a variable quality is acceptable, such as e-mail and
data file transfers. For applications where real-time interaction is not
necessary, such as e-mail, the electronic order in which the data packets arrive
or the delay between delivery of the data packets is unimportant. However,
real-time applications, like Internet telephony, downgrade when there are long
delivery delays between data packets. Traditional Internet transmissions have
often not met the high standards for sound transmitted on the PSTN. USA Talks
expects to maintain the "toll quality" of voice sound with its Intranet,
utilizing proprietary routing to transmit long distance-telephone calls.
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PRIVATE NETWORK ARCHITECTURE
To facilitate providing a low-cost, high quality telephone service, the
Company has chosen to use the VOIP technology for its network infrastructure now
under development nationwide. Given the recent advancements made in voice
compression algorithms and Digital Signal Processors ("DSPs"), the overall
quality of the network is expected to maintain the "toll quality" of the PSTN.
The Company's Digital Voice Gateway ("DVG") platform, which utilizes
equipment manufactured by Franklin Telecommunications, Inc., converts voice
signals originating locally by telephone into IP digital data packets using a
DSP and ancillary software located at each POP. The DVG platform compresses the
speech and converts it into digital message packets transmitted by the
Company's Intranet network and commercial high-speed router owned by an ISP
under contract, directing the packetized data to and from other
inter-connected DVGs. The Company's private IP network and infrastructure of
DVGs are also connected to selected CLECs under contract with the Company,
thereby allowing the delivery of the reconstructed voice transmission to the
destination telephone.
The DVG platform, therefore, provides for a connection between the calling
party and the destination party using the Company's private Intranet and the
PSTN. The destination telephone number is automatically matched to an IP
address. The private IP network routes the call to a DVG connection that is
continuously "on" at all times and immediately terminates each call at the
intended location. The intended result is that the telephone-to-telephone
consumer will be using VOIP without realizing it.
The development of the Company's Intranet will provide its customers
with a maintainable quality VOIP telephone service as compared to the
PSTN. The overall effectiveness of USA Talks.com's DVG platform is primarily
attributable to seven primary factors:
1. The Company's private IP-based configuration of equipment, lines and
services is under the sole control of USA Talks.com and its vendor
service companies;
2. Industry relationships developed by one of the Company's consultants
have enabled USA Talks.com to enter into favorable fixed-rate
contracts with its ISPs CLECs, and certain other service providers.
3. The Company has proprietary contracts with its ISPs limiting the
latency factor to ensure maintainable "toll quality" voice telephone
communications; and
4. The use of high-speed DSPs for voice compression and advanced
algorithms allow for the transmission of highly compressed voice
while maintaining the quality that the consumer expects;
5. Affordable, off-the-shelf technology is now available that allows the
simple integration of the PSTN, voice compression systems, and,
in turn, the Company's private IP network;
6. The Company's proprietary routing, strategic location of POPs and
minimum usage of the PSTN; and
7. The customer is not required to have any special hardware or software,
but simply needs
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a telephone, eliminating the need for any additional interfacing
equipment or software.
Thus, the Company's soon to be available nationwide private IP
network and VOIP long-distance telephone service has a number of advantages
over the PSTN and the public Internet: low-cost, flat-rate monthly charges,
voice quality, and ease of use establishes a basis for a new and innovative
market, namely long distance VOIP. By deploying a private IP-based network,
such as the Company's DVG network, and proprietary routing for better service
and lower cost, the Company's long-distance service should be highly
competitive. In addition, there are significant cost reductions due to the
advantages of lower capital investment and the efficiency and hence reduction
in bandwidth (transmission) costs. Further, due to the seamless integration
of the PSTN and IP networks such as the Company's DVG network, IP telephony
services can be provided to customers without the customer's direct awareness
of the technology involved. In the future, other enhancements such as voice
recognition and speaker verification can be made via phone-to-phone
connections through IP telephony gateways.
MARKETING AND SALES STRATEGIES
EMERGING INDUSTRY
The Internet telephony industry is rapidly emerging as an acceptable voice
communications platform as a result of technological innovations and
advancements in VOIP applications. According to Probe Research, revenues for the
Internet telephony business are expected to grow from $200 million in 1998 to
nearly $5 billion by the end of 2002, representing an annual growth rate in
excess of 100%. The projected revenue growth is attributable to several
consumer-driven factors including lower costs and improved quality of service,
and reflecting, in the near future, the ability of a single service provider to
integrate voice, data and video transmissions. Other standard office automation
features are expected to be added, such as caller ID, conference calling, call
waiting, and voice mail.
The ability to transmit voice over data networks using IP technologies has
forced traditional telecom network carriers relying on more expensive
switch-based infrastructures to reconsider their long-term operating strategies.
Upgrading of traditional networks is undesirable since it would require
significant additional expenditures which would have to be depreciated over a
relatively short period due to obsolescence. The other alternative for these
mega-carriers is to lower selling prices on their higher fixed-cost operating
platforms, resulting in substantial margin reductions.
IP networks avoid this dilemma by eliminating the need for expensive
hardware configurations, substituting less expensive software solutions where
the intelligence is imbedded in the software, and can easily be modified. IP
network software solutions eliminate the need for the very substantial hardware
costs traditionally incurred in the telecommunications industry since
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inexpensive (and unintelligent) generic hardware can be used on the IP
network in place of "smart" but capital-intensive circuit-switched hardware.
Competition between the various providers of long-distance telephone
services is already intense, but the Company believes that a pricing plan
offering a low fixed monthly charge will meet with significant consumer
acceptance. USA Talks.com's appealing flat-rate pricing structure, its
private network capabilities developed to offer VOIP, with its lower
capital requirements and operating costs, and its intention to deliver
maintainable "toll quality" sound, with telephone-to-telephone long-distance
service, should make the Company's service highly competitive in what is one
of the largest industries worldwide.
MARKET AWARENESS
Since the Company knows of no other long-distance providers that are
offering comparable services over a private, high-quality network, with a flat-
rate pricing structure, its marketing efforts will be straightforward.
Initially, the efforts will be geared to increasing the level of awareness of
USA Talks.com's long-distance services and thereby establishing a strong
brand name for its services. These efforts will be directed toward the full
spectrum of telcom customers, including small office and home office ("SOHO")
users, residential customers, medium and large-sized businesses, resellers,
and specialized industry groups.
MARKETING AND DISTRIBUTION
USA Talks.com's distribution plan is designed to make fixed-charge
communications services readily available to the general public through
channels that can distribute cost-effectively its services. Maintainable high
quality of calls and excellent customer services, will be paramount.
DISTRIBUTION STRATEGY
To address the economies in today's marketplace, and to address the
specific purchasing preferences of the targeted market segments. USA Talks.com
has designed a targeted distribution concept based upon three types of
traditional sales channels: (1) telemarketing ("telesales"), both inbound and
outbound, including utilizing outsource telemarketing centers under contract and
managed by the Company; (2) direct sales, including major account teams and
corporate account teams, and agent sales conducted through independent agents
operating on a face-to-face basis; and (3) independent resellers. Each USA
Talks.com distribution channel will target one or more specific market segments
as shown below:
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PURCHASING CHARACTERISTICS:
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MARKET SEGMENT CHANNEL PROFILE/NEEDS
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Business Corporate (Large) Corporate Account or Major Vast product knowledge
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Account Team Industry expertise
Strategic selling
Relationship selling
Personal service
Full range of products
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Business (Small to Medium) All Channels Up-to-date sales staff
Competitive pricing
Wide range of products
Convergent billing
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Residential (Large consumer) Agents, Resellers, Telesales, Wide array of easy-to-use products
Competitive pricing
Customized solutions
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Residential (Small consumer) Agents, Resellers, Telesales Standard products
Convenient services
Competitive pricing
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TELEMARKETING ("TELESALES")
USA Talks.com's telesales channel will primarily target small to
medium-sized business with less than 50 employees and residential users. In
order to facilitate rapid growth, the Company will complement its telesales
channel with an aggressive advertising effort via print media and radio and
television.
Outbound telesales has the capability of covering a broad geographic
area yet is flexible enough to permit target marketing in specific locations to
customers with particular demographic profiles. Inbound telesales gives
potential USA Talks.com customers the ease of reaching a trained professional
representative through the toll-free number, 877 USA-FLAT (877 872-3528). The
representative can assist with any questions and the registration of the new
customer. Additionally, it serves as the focal point to receive responses to all
print, radio and television media advertising.
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Only well-trained proven professional telemarketing centers that have
previously had success in selling long-distance telephone products and services
will be relied upon in the telesales activities. The compensation of
telemarketers is performance-based and will be tracked closely for desired
results. All new USA Talks.com customers are registered on-line using a
comprehensive order-entry system. This allows for accurate "real-time"
information for the activation of the customer into the USA Talks.com network
and the related servicing of new customers.
The Company has contracted with Unlimited Long Distance, Inc. ("ULD"),
an established telemarketing company, for a one-year term to conduct the USA
Talks.com's telesales program under the Company's direction. ULD began training
several telemarketers in early February, 1999, and on February 27, 1999 it began
actual telesales activities. As of March 29, 1999, as a result of ULD's
telesale activities, the Company had been informed, that in excess of 9,000
new customers have subscribed generating approximately $1.1 million dollars
in gross revenue, of which a major portion is attributable to non-recurring
one-time sign-up fees.
DIRECT SALES
MAJOR ACCOUNT SALES TEAM
This group will target Fortune 500 corporations, institutions and
government accounts. The emphasis for these salespeople will be on large and
specialized application sales, including voice, data and ISP solutions. They
will offer tailor-made communications solutions at competitive pricing and offer
a high level of account servicing. Sales engineers will support the sales team
in a joint effort to deliver to its accounts lower cost, and maintainable
long-distance service.
CORPORATE ACCOUNT SALES TEAM
This group will target businesses with less than 50 employees to obtain
and retain small to medium-sized commercial accounts within a defined
geographic territory.
AGENTS
USA Talks.com intends to create a network of exclusive and
non-exclusive agents, targeted to specific market segments and niches in a
defined territory. Acting as a communications consultant, agents will help
enhance industry presence, promote brand recognition, and educate consumers
on the benefits of the Company's services
The Company intends to pursue a rigorous agent selection process in an
effort to ensure that its agents have the capability to service their customers
professionally. The main criteria are that the agents have strong local
relationships and have successful past experience in marketing communications
products and services. USA Talks.com will provide its agents with sufficient
material and resources to develop and grow their business.
RESELLERS
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A reseller is an independent marketer that purchases services from USA
Talks.com at wholesale prices and then resells them at a mark-up, as compared
with agents who sell the services at their retail price and receive commissions.
The reseller can offer its own unique pricing plans to end users, employ many
different distribution channels, billing methods and customer service
approaches, and bundle together different types of services, thus
differentiating its business from that of USA Talks.com.
BRAND RECOGNITION
While the objective in the short term is to quickly penetrate targeted
niche markets within selected geographic territories, the long-term plan is for
the Company to shift from direct selling to mass media communications.
Development of a strong brand name in the United States will facilitate USA
Talks.com's opportunities to penetrate foreign markets.
FOREIGN MARKETS
Expansion of the Company's private IP network outside the continental
United States is not expected to occur until the early part of the year 2000,
and will depend upon the availability of adequate capital and qualified
personnel.
COMPETITION
The market for Internet telephony services is expected to be
extremely competitive. USA Talks.com believes that its long-distance service
will be competitive because of its voice quality, nationwide availability of
service, flat rate monthly pricing policies, capacity, and the security of
its private IP infrastructure. While there are competitors offering IP
services which permit voice communication between two parties simultaneously
connected to the Internet, to the best knowledge of the Company, these
competitors' services require their customers to use multimedia PCs or other
specialized equipment, including identical IP software products. Current
product offerings include VocalTec's Internet Phone, QuarterDeck's WebPhone
and Microsoft's NetMeeting. In addition, a number of large, well capitalized
companies, such as AT&T, MCI, Sprint, LDDS/WorldCom, Excel, Qwest, Cisco,
Intel, Lucent, Nortel, and Dialogic, have announced their intentions to offer
a variety of services that are expected to facilitate communications over the
Internet. These companies, as well as others, including the hardware and
software manufacturers of products employed in the telecommunications
industry, may develop products and services that compete with USA Talks.com
in the future. Certain of these entities are significantly better financed
than USA Talks.com and already enjoy a greater market share and control than
the Company. Also, other companies may wish to inter the Internet telephony
industry, and may develop technology and marketing strategies that would
compete with USA Talks.com.
USA Talks.com knows of no other competitors to date that are offering a
product similar to its telephone-to-telephone, flat rate "all you can talk",
maintainable "toll quality" long-distance service. Most long-distance
competitors are deploying their networks to simply provide customers with
cheaper dial tone than the PSTN. Unfortunately for the customer, many ISPs
oversell their services, route calls over the public Internet, use inadequate
IP telephony software, and charge based upon an unpredictable and variable
cents-per-minute.
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The result is less than satisfactory quality of voice transmission (due to
latency, echo and dropouts) and variable monthly billing. USA Talks.com's
private IP network is a managed network coupled with proprietary routing
technology to ensure high quality of sound, dependable ordinary
telephone-to-telephone service, and a predictable flat monthly rate.
GOVERNMENT REGULATION
The Federal Communications Commission (the "FCC") encourages the
development of enhanced telecommunication services as well as Internet-based
services by keeping such activities free of unnecessary regulation and
government influence. Specifically in the area of use of the Internet for
telecommunications use of the Internet, the FCC has established a "hands off"
policy and has no plans (of which the Company is aware) to regulate most
online Internet services under the general rules that apply to telephone
companies. This approach is consistent with the passage of the
Telecommunications Act of 1996 ("1996 Act") which expresses a Congressional
intent "to preserve the vibrant and competitive free market that presently
exists for the Internet and other interactive computer services, unfettered
by Federal or State regulation."
The FCC has continually refrained from regulating value-added networks
("VANs"), software or computer equipment that offer customers the ability to
transmit data over telecommunications facilities. By definition, VAN operators
purchase or lease transmission facilities from "facilities-based" carriers and
resell them with data packet transmission and protocol conversion services.
Under current rules, such operators are excluded from regulations that apply
to "telecommunications carriers" under Title II of the Communications Act.
The FCC's long-standing position was recently reaffirmed in its February 26,
1999 ruling that enhanced services, including Internet services, will remain
exempt from interstate charges.
Subsequent to the 1996 Act, the FCC has been reviewing many of its past
decisions to determine whether the common carrier regulations, apply to the
transmission and reselling telecommunications facilities used to provide
telecommunications services, or are they part of an "enhanced" or information
service package, which would make the regulations inapplicable. The Company
believes that the FCC will continue to interpret its rules so that IP
protocol conversion gateways, proprietary routing procedures, and
interconnectivity will qualify for the exemption classifications for Internet
services. If the Company is correct, it would not be required to contribute
to federal universal service funding mechanisms. There is no assurance,
however, that telecommunication-enhanced services, including Internet
services, will remain exempt from interstate charges or regulation.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES
The Company occupies leased facilities in La Jolla, California providing
office space for the corporate administrative operations, engineering, Internet
services, and marketing activities. The facility is 5,730 square feet, with a
monthly lease rate of $10,027, expiring on April 30, 2000. The Company is
currently negotiating for an additional 5,000 square feet of office space.
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ITEM 3. LEGAL PROCEEDINGS
PENDING OR THREATENED LITIGATION, CLAIMS OR ASSESSMENTS (EXCLUDING UNASSERTED
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 investigation concerned whether in
connection with an offer for or 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
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. The temporary suspension ended on February 11, 1999, but
the SEC is continuing its investigation of the Company.
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. We have reached tentative
agreement with TrendMark to settle this dispute. We have been asked to
prepare the Settlement Agreement, and have circulated a drafts to the Company
and counsel for TrendMark. There are several issues that remain to be
resolved with respect to the specific terms of the proposal settlement and we
cannot provide any assessment of whether this matter will be resolved on the
proposed terms, if at all.
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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.
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
compainants 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 sinding 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.
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 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.
The last day to respond to the first filed complaint is April 5, 1999.
However, plaintiffs have agreed to defer defendants' last day to respond to
the complaints until 45 days after a lead plaintiff is designated by the
court pursuant to the Private Securities Litigation Reform Act of 1995.
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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (SEE S-B 201 AND 701]
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol USAT. The following table sets forth the range of high and low bid
quotation per share for the Common Stock as reported by the OTC Bulletin
Board during the calendar years indicated. The bid price reflects
inter-dealer prices and does not include retail mark-up, markdown, or
commission. The prices also reflect the 4:1 stock split which are effective
February 1, 1999.
<TABLE>
<CAPTION>
LOW HIGH
---- ----
<S> <C> <C>
N/A 1998 First Quarter............................. N/A
N/A Second Quarter............................. N/A
$.63 Third Quarter............................. $1.50
$.63 Fourth Quarter............................. $4.56
</TABLE>
The Company has never declared or paid a cash dividend on its Common
Stock and does not expect to pay any cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [SEE S-B 303]
THIS SECTION OF THIS REPORT ON FORM 10-KSB CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
FORWARD-LOOKING INFORMATION
This report contains certain 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.
NOTE: All
13
<PAGE>
securities (common stock, options and warrants) are restated to reflect the 4
for 1 stock split effective 2/1/99.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the Years Ended December 31,
1998 1997
---- ----
<S> <C> <C>
Operating expenses:
Legal $ 111,519 $ 274,220
Selling, general and administrative 3,853,153 767,588
Research and development 1,276,811 627,421
Salaries and other compensation 835,199 177,750
----------- -----------
Total operating expenses 6,076,682 1,846,979
----------- -----------
Loss from operations (6,076,682) (1,846,979)
----------- -----------
Other income (expense)
Interest income 6,108 711
Interest expense (28,014) (15,783)
----------- -----------
Total other income (expense) (21,906) (15,072)
----------- -----------
Net loss before provision for income taxes (6,098,588) (1,862,051)
Provision for income taxes 800 -
----------- -----------
Net loss for the year $(6,099,388) $(1,862,051)
----------- -----------
----------- -----------
Basic loss per common share $ (0.11) $ (0.04)
----------- -----------
----------- -----------
Average common shares outstanding 57,444,039 48,473,153
----------- -----------
----------- -----------
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31,
1998 1997
---- ----
<S> <C> <C>
Cash $4,338,438 $ 112,314
Total current assets 4,352,860 124,817
Total assets 8,419,698 167,563
Total current liabilities 4,808,083 549,366
Shareholders' equity (deficit) 3,611,615 (381,803)
Total liabilities and shareholders equity 8,419,698 167,563
</TABLE>
1998 COMPARED WITH 1997
USATalks.com, Inc. is a development stage company that had no revenues
for the reporting periods ended December 31, 1998 and 1997. Net losses for
1998 and 1997 were $6.1 million and $1.9 million, respectively. Of the total
loss in 1998, $2.1 million or 35% was attributable to consulting fees
($1,276,811) and salaries and wages ($835,199). These operating expenses were
incurred to fund on-going research activities on core technologies; the
design of the nationwide network, including contract negotiations with
equipment and service vendors as well as with CLECs and other carriers; 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, thereby enabling it to compete in the
long-distance telephone service market in 1999. Of the total loss, $1,079,848
or 17% was incurred in large part to support office administration activities
attendant to the Company's on-going efforts to deploy and test its California
IP network, a beta test site operated on a "no fee" basis through year-end.
(There were approximately 60,000 test calls made from the middle of October
to December 31, 1998.) Finally, $2.9 million of the $3,853,153 selling,
general and administrative expenses, or 48% of the $6.1 million loss in 1998
was due to a non-cash charge to the Company relating to the issuance of
warrants that entitle the holder(s) to purchase 6,764,000 shares at $.015 per
share. These warrants were issued to consultants of the Company in
consideration of their services rendered in connection with a corporate
reorganization with SBB, Inc. consummated July 29, 1998.
Substantially all expenses accounting for the $1.9 million loss in 1997
were also developmental in nature and included salaries, consulting fees and
office-related support activities totaling $1.6 million; legal expenses
accounted for substantially all of the $274,220 balance. In 1997, development
expenses were incurred primarily to continue development of proprietary
speech-based technologies, whereas in 1998 the focus on the VOIP project,
with the further development of speech recognition and speaker identification
being of lesser concern.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was approximately $1.7 million for the year
ended December 31, 1998. Capital expenditures consumed another $3.1 million,
all of which was used for equipment purchases and installation costs for the
build-out of the Company's private national VOIP network. As of year-end,
approximately $2 million in equipment purchase and installation costs were in
accounts payable and made pursuant to purchase orders with the Company's
primary equipment and service suppliers. Cash on hand at the end of 1998 was
$4.3 million.
14
<PAGE>
In order to meet its scheduled build-out and implementation dates
over the next 12-month period, the Company plans to expend additional capital
for the construction of its private IP network at the rate of approximately
$1 million per month (or, subject to the availability of capital resources,
$3 million under a more accelerated plan), or an estimated $12 million in
1999 (or, subject to the availability of capital resources, $36 million under
a more accelerated plan). In addition, the Company will incur additional
operating losses 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 area served. The Company estimates 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, requiring no
investment by the Company in trade accounts receivable.
During 1998, the Company completed $9.0 million in private Debt and
equity financing and another $6.0 million has been received since year-end.
Approximately $10-15 million in additional capital is needed to fund the
Company's planned capital investments and budgeted operating losses 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 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 based
upon the strong continuing interest of prospective private investors. 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, once profitable, the Company will be able to generate
substantial capital from on-going operations for investment in its expansion,
which will be accelerating.
15
<PAGE>
BUSINESS RISK FACTORS
With the exception of historical facts, the statements in Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements based on current expectations that involve risks and
uncertainties. USATALKS.com wishes to caution the reader that the following
important factors, and those factors described elsewhere in this report, could
affect the Company's actual results, causing such results to differ materially
from those expressed in any forward-looking statement contained in this report.
QUALITY OF VOICE COMMUNICATIONS -
Generally, VOIP has produced to date a telephone call of inferior
sound quality, often the result of utilizing the public Internet for
transport. The expectation of the Company is that its private network and
direct routing methodologies will result in a reliable, "toll quality" call.
There is no assurance, however, that the quality of call will readily meet
with market acceptance, although the Company's expectation is that its
private network will deliver consistently call quality that will meet the
demands of commercial and residential users.
COMPETITION -
The Company anticipates intense competition will develop over time
as consumer acceptance levels for VOIP long-distance telephone service rise.
To a large extent reliable voice quality depends upon the commitment by
traditional equipment makers to improve Internet phone technologies and
develop better telephony products designed specifically to serve the VOIP
users. At present, AT&T is experimenting with its own Internet telephony
operation; Sprint and MCI WorldCom are not offering VOIP calls at this time.
While historically, competition in the telecommunications industry has been
keen, the Company believes it has a window of opportunity to become the VOIP
market leader, differentiating itself on the basis of its high-quality
private network and proprietary routing methodologies, commitment to
excellence in customer service, and first-to-market advantage. Further, the
Company believes its proprietary technologies, if and when fully deployed,
will provide additional competitive advantages.
REVENUE GENERATION -
Once the initial phase of the national network is operational in May
1999, the monthly cash "burn rate" will be approximately $600,000, $400,000
in monthly network costs and $200,000 in monthly general and administrative
expenses. 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 rollout of an expanding network.
ADHERENCE TO OPERATING STANDARDS -
The challenge for the Company will be to develop an organizational
and operations plan for its own business processes that can accommodate the
anticipated rapid growth in its customer base. Management's resource planning
will be
16
<PAGE>
critical, therefore, to the Company's success, as growth must be controlled
to avoid any degradation in call quality or customer service levels.
INTEROPERABILITY -
Interoperable VOIP hardware devices are compatible with the devices
and services of multiple vendors and can be integrated into a generic
network, ensuring multiple sources and high quality. This is a significant
factor among expansion considerations, since any device integrated into the
Company's private network needs to have versatility in functionality. The
Company's existing VOIP hardware provider does not meet the Company's
long-term standard for interoperability and, therefore, places certain
limitations on the Company's ability to quickly adopt new vendor equipment of
greater PRI capacity for handling high-level call volumes. If the Company
were to opt for the more efficient high-density equipment, these
enterprise-level assets can be re-deployed to larger commercial accounts for
their intra-company telecommunications needs. This matter of interoperability
therefore, is being factored into a current study by the Company for it to
enable both a carrier class national network as well as enterprise level
service offerings.
FIXED V. VARIABLE RATE CONTRACTS FOR CALL TERMINATION -
By far the greatest element of transport cost for any national
long-distance provider is the cost to terminate calls of long-distance
providers that are charged by the LECs and ILECs that control the local
service areas. Accordingly, the risk level to the Company decreases as the
percentage of fixed-rate contracts for call termination increases. This is
the case because the Company's service is provided to the consumer on an
"all-you-can-talk" basis for a set fixed fee, yet call utilization rates, or
the average minutes per call, is expected to rise compared with those
utilization patterns associated with variable rate, or cents per minute pay
plans. The objective, therefore, is for the Company to enter into as many
flat-rate CLEC contracts as possible for call termination. To the extent the
company does not increase favorably its mix of fixed cost contracts as is
planned, margins may also be negatively impacted.
NEW LEGISLATION -
At present, the Company knows of no new legislation or regulations
that would interfere with projected operating margins or the ability of
USATalks.com to freely market its telephone services over the Internet. In a
February 26, 1999 ruling, the FCC maintained its "hands off" policy regarding
regulation of the Internet and affirmed its policy that enhanced services,
including the Internet specifically, will remain exempt from interstate
charges.
OTHER MATTERS
17
<PAGE>
PROPRIETARY TECHNOLOGIES -
At present, USATalks.com has not fully integrated its voice
recognition, voice verification and voice compression technologies into its
VOIP long-distance service. The objective is to have full integration of
voice recognition and voice verification in 1999; further research and
development will be required to take full advantage of the Company's
proprietary compression technology.
PURCHASE OF TWO PATENTS ON COMPRESSION TECHNOLOGY
Subsequent to December 31, 1998, pursuant to an Agreement and Plan of
Reorganization under investigation 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 3,780,000 shares of the Company's common stock and $900,000 in
cash. As of March 29, 1999, approximately 70% of the holders of CTI's issued
and outstanding shares have submitted proxy statements approving 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. Two of the Company's officers/directors and their
affiliates own an aggregate of 1,056 shares of CTI representing approximately
13% of the total issued and outstanding shares of CTI.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
TABLE OF CONTENTS
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
DECEMBER 31, 1998
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity (Deficit) F-4 - 5
Consolidated Statements of Cash Flows F-6 - 7
Notes to Consolidated Financial Statements F-8 - 24
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 10(a) OF EXCHANGE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Allen J. Portnoy 72 Chief Executive Officer and Director
William H. Ervine, Jr. 52 President and Director
Stephen A. Storey 49 Chief Operating Officer and Director
Max Spencer Kissell 50 SVP of Corporate Affairs and Director
Jack C. Alexander 65 Chief Financial Officer
</TABLE>
Allen J. Portnoy is Chief Executive Officer of USA Talks.com, Inc.
Prior to his responsibilities at USA Talks, Inc. Allen Portnoy's career
included founding and running several public companies. Mr. Portnoy founded
and served as the Chief Executive Officer of Permaneer Corporation. In 1974
Allen Portnoy purchased Defiance Screw Machine Company, Defiance Ohio. From
1979 to 1985 Mr. Portnoy held the positions of founder, Chief Executive
Officer and President of Spartech, Inc. From 1992 to 1996 Allen Portnoy
served as Chairman of Compression Technologies, Inc. From 1991 to 1998 Mr.
Portnoy held the position of Chairman of the Board of Directors and Chief
Executive Officer of Alfine Corporation, the predecessor to USA Talks.com.
William H. Ervine, Jr., is President of USA Talks.com, Inc. Prior to
working for USA Talks, William Ervine was actively engaged in the private
practice of law. From 1975 to 1979 he was a partner in Banister, Ervine &
Loeffler, Kerrville, Texas, a firm specializing in civil litigation. From
1992 to 1996 William Ervine served as President of Compression Technologies,
Inc. From 1991 to 1998 Mr. Ervine held the position of President and
Director of Alfine Corporation, the predecessor to USA Talks.com, Inc.
Stephen A. Storey is Executive Vice President and Chief Operating
Officer. Formerly, he was President and CEO of a nationwide wholesale
distribution operation in a development-stage company, executing a
consolidation strategy within its industry. Prior to that he was Executive
Vice President of Finance and Development for Patient First Corporation, an
owner and manager of health care facilities developed under operating
agreements with Johns Hopkins Health System (MD) and Trigon BCBS (VA). He
also held the position of Vice President and Chief Financial Officer of
Kellam Companies, wholesale distributors of petroleum products and operators
of a start-up retail chain of convenience stores. Mr. Storey was with KPMG
Peat Marwick for five years in Miami and Raleigh and was a Certified Public
Accountant in both Florida and North Carolina.
M. Spencer Kissell is Senior Vice President of Corporate Affairs and
oversees Investor Relations and Public Communications. Formerly, he was
Senior Trust Officer for Bank of the West, San Angelo Texas and Senior Vice
PResident and Trust Department Manager for Texas Commerce Bank, San Angelo,
Texas, as well as service as an advisory director to the board. As a private
businessman, he has also been involved with oil and gas interests in the
Southwest US. Mr. Kissell has many years experience personally managing
estates and trusts for high net worth individuals and is conversant on
matters relating to private and public investments in securities.
Jack C. Alexander was appointed Chief Financial Officer of USA Talk.com,
Inc. in 1998. In 1997, Jack Alexander was Corporate Controller of Alfine
Corporation. From 1962 to 1974 he worked for the international accounting
firm Alexander Grant and Company of Phoenix, Arizona. In 1974 Mr. Alexander
founded his own accounting firm Alexander & Devoley. From 1979 to 1980 Jack
Alexander served as Controller for Ninteman, A San Diego based General
Contractor. In addition from 1986 to 1989 Jack Alexander served as Chief
Financial Officer of Anesthesia Medical Groups of San Diego, California.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid or accrued by
the Company during the years ended December 31, 1997 and December 31, 1998 to
its CEO, President and its Chief Financial Officer (the "Named Executive
Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
--------------------------------- -----------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Allen J. Portnoy, CEO ....................... 1997 $ 33,310 -0- -0-
1998 $111,000 $150,000 -0-
William H. Ervine, Jr., President............ 1997 $ 22,500 -0- -0-
1998 $111,000 $150,000 -0-
Jack C. Alexander, Chief Financial Officer 1997 $ 22,500 $ 5,000 -0-
1998 $ 86,000 $100,000 -0-
</TABLE>
Except as disclosed above, no compensation characterized as long-term
compensation, including restricted stock awards issued at a price below fair
market value or long-term incentive plan payouts, were paid by the Company
during the years ended December 31, 1997 and 1998 to any of the Named
Executive Officers.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
18
<PAGE>
Common Stock constitutes the only voting securities of the Company. The
table below sets forth information, to the best of the Company's knowledge, with
respect to the total number of shares of the Company's Common Stock,
beneficially owned by each director, the Named Executive Officers, each
beneficial owner of more than five percent of the Common Stock, and all
directors and executive officers as a group, as of December 31, 1998. On that
date, there were 62,299,648 shares of the Company's Common Stock outstanding.
(NOTE: ALL SHARES HAVE BEEN RESTATED TO REFLECT THE 4:1 STOCK SPLIT THAT WAS
EFFECTIVE FEBRUARY 1, 1999)
<TABLE>
<CAPTION>
Number of Shares % of Outstanding Shares of
Beneficial Owner (1) Beneficially Owned Common Stock Benef. Owned
- -------------------- ------------------- -------------------------
<S> <C> <C>
Allen J. Portnoy
CEO and Director 5,537,710 8.89%
William H. Ervine, Jr.
President and Director 3,003,153 4.82%
Stephen A. Storey
Director 492,759 0.79%
M. Spencer Kissell
Director 0 0.00%
Jack C. Alexander
Chief Financial Officer 92,880 0.15%
All Executive Officers and
Directors as a Group
(5 Persons) 9,126,502 14.65%
</TABLE>
- -----------------------------
(1) Unless noted, all of such shares of Common Stock are owned of record by
each person named as beneficial owner and such person has sole voting
and dispositive power with respect to the shares of Common Stock
O
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
19
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
1. (a) The following exhibits are filed as part of this Report:
See Exhibit Index.
2. (b) Reports on Form 8-K:
None
20
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USA Talks.com, Inc.
By /s/ Allen J. Portnoy
--------------------
Allen J. Portnoy
Chief Executive Officer
Dated: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer
/s/ Allen J. Portnoy Chief Executive Officer and a March 29, 1999
-------------------- Director
Allen J. Portnoy
(2) Principal Financial and Accounting Officer
/s/ Jack C. Alexander Chief Financial Officer March 29, 1999
----------------------
Jack C. Alexander
(3) Directors
/s/ William H. Ervine, Jr. President and a Director March 29, 1999
-------------------------
William H. Ervine, Jr.
/s/ Stephen A. Storey Director March 29, 1999
---------------------
Stephen A. Storey
/s/ Max Spencer Kissell Director March 29, 1999
-----------------------
Max Spencer Kissell
</TABLE>
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
23.1 Consent of Independent Certified Public Accountants
27.1 Financial Statements
</TABLE>
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
DECEMBER 31, 1998
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity (Deficit) F-4 - 5
Consolidated Statements of Cash Flows F-6 - 7
Notes to Consolidated Financial Statements F-8 - 24
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
USA Talks.com, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of USA Talks.com,
Inc. and subsidiaries (a development stage company) (the "Company") as of
December 31, 1998, and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the two years in the
period ended December 31, 1998, and for the period from August 26, 1991
(inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of USA
Talks.com, Inc. and subsidiaries as of December 31, 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended December 31, 1998, and for the period from August
26, 1991 (inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company incurred a net loss of $6,099,388
during the year ended December 31, 1998. These factors, among others, as
discussed in Note 2 to the consolidated financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
On January 28, 1999, the United States Securities and Exchange Commission (the
"SEC") issued an order directing a private investigation of the Company and
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.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 12, 1999
F-1
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
December 31,
1998
-------------
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,338,438
Prepaid expenses and other current assets 14,422
------------
Total current assets 4,352,860
FURNITURE AND EQUIPMENT, net 3,166,838
OTHER ASSETS 900,000
------------
TOTAL ASSETS $ 8,419,698
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,466,281
Note payable - related party 1,430
Contract payable 59,460
Accrued expenses 28,412
Convertible promissory notes 2,252,500
------------
Total current liabilities 4,808,083
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock: $0.001 par value
400,000,000 shares authorized
62,299,648 shares issued and outstanding 62,300
Additional paid-in capital 12,691,610
Deficit accumulated during the development stage (9,142,295)
------------
Total shareholders' equity 3,611,615
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 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>
August 26,
1991
Year Ended Year Ended (Inception) to
December 31, December 31, December 31,
1998 1997 1998
----------- ----------- ---------------
<S> <C> <C> <C>
OPERATING EXPENSES
Selling, general, and administrative $3,853,153 $ 767,588 $ 4,848,210
Research and development 1,276,811 627,421 2,377,141
Salaries and other compensation 835,199 177,750 1,205,787
Legal 111,519 274,220 473,719
----------- ----------- -----------
Total operating expenses 6,076,682 1,846,979 8,904,857
----------- ----------- -----------
LOSS FROM OPERATIONS (6,076,682) (1,846,979) (8,904,857)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 6,108 711 7,347
Interest expense (28,014) (15,783) (53,985)
----------- ----------- -----------
Total other income (expense) (21,906) (15,072) (46,638)
----------- ----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (6,098,588) (1,862,051) (8,951,495)
PROVISION FOR INCOME TAXES 800 -- 800
----------- ----------- -----------
NET LOSS $(6,099,388) $(1,862,051) $(8,952,295)
----------- ----------- -----------
----------- ----------- -----------
BASIC LOSS PER COMMON SHARE $ (0.11) $ (0.04) $ (0.27)
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 57,444,039 48,473,153 33,136,249
----------- ----------- -----------
----------- ----------- -----------
</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 SHAREHOLDERS' EQUITY (DEFICIT)
AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
OPENING BALANCE,
AUGUST 26, 1991 - $ - $ - $ - $ -
STOCK ISSUED TO
FOUNDERS FOR
SERVICES RENDERED 38,388,622 38,389 (19,968) - 18,421
SALE OF COMMON STOCK
UPON INCORPORATION 2,509,574 2,509 177,491 180,000
STOCK ISSUED FOR
SERVICES RENDERED 1,777,615 1,778 125,722 127,500
SALE OF COMMON
STOCK 1,643,773 1,644 369,356 371,000
SALE OF WARRANTS 2,650 2,650
CAPITAL CONTRIBUTION 3,750 3,750
NET LOSS FROM INCEPTION
THROUGH DECEMBER
31, 1996 (990,856) (990,856)
------------- ---------- ----------- -------------- ------------
BALANCE, DECEMBER 31,
1996 44,319,584 44,320 659,001 (990,856) (287,535)
SALE OF COMMON STOCK 4,265,170 4,265 967,419 971,684
SALE OF WARRANTS 40,657 40,657
STOCK ISSUED UPON
CONVERSION OF
NOTES PAYABLE 219,588 220 52,280 52,500
STOCK ISSUED FOR
BUSINESS
COMBINATION 8,365,248 8,365 (8,285) 80
STOCK ISSUED FOR
SERVICES RENDERED 506,620 507 26,243 26,750
STOCK ISSUED FOR
FURNITURE AND
EQUIPMENT 130,707 131 24,869 25,000
STOCK ISSUED FOR
AN OPTION TO
LICENSE TECHNOLOGY 209,131 209 49,791 50,000
OPTIONS ISSUED TO
NON-EMPLOYEES 433,020 433,020
CONVERSION OF
ADVANCE FROM
OFFICER 37,750 37,750
CAPITAL CONTRIBUTION 130,342 130,342
NET LOSS (1,862,051) (1,862,051)
------------- ---------- ----------- -------------- ------------
</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)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1997 58,016,048 $ 58,017 $ 2,413,087 $(2,852,907) $ (381,803)
SALE OF COMMON STOCK 14,090,798 14,091 6,814,414 6,828,505
STOCK ISSUED FOR
SERVICES 870,213 870 328,526 329,396
STOCK ISSUED UPON
CONVERSION OF NOTES
PAYABLE 254,479 254 54,746 55,000
SALE OF WARRANTS 72,250 72,250
EXERCISE OF WARRANTS 361,200 361 74,639 75,000
WARRANTS ISSUED FOR
SERVICES 2,907,530 2,907,530
PURCHASE OF COMMON
STOCK AND
CANCELLATION (11,293,090) (11,293) (48,707) (190,000) (250,000)
CAPITAL CONTRIBUTION 75,125 75,125
NET LOSS (6,099,388) (6,099,388)
------------- ---------- ------------- -------------- ------------
BALANCE, DECEMBER 31,
1998 62,299,648 $ 62,300 $ 12,691,610 $ (9,142,295) $ 3,611,615
------------- ---------- ------------- -------------- ------------
------------- ---------- ------------- -------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 26,
1991
Year Ended Year Ended (Inception) to
December 31, December 31, December 31,
1998 1997 1998
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,099,388) $ (1,862,051) $ (8,952,295)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 11,034 10,107 21,985
Issuance of options and warrants 2,907,530 433,020 3,340,550
Issuance of stock for services rendered 329,396 26,750 502,067
Issuance of stock for an option to license
technology - 50,000 50,000
(Increase) decrease in
Other receivables - 11,065 -
Prepaid expenses and other current assets (1,919) (9,730) (14,342)
Other assets (899,802) 5,627 (900,000)
Increase (decrease) in
Accounts payable 2,044,593 342,777 2,466,281
Accrued expenses 36,966 (40,811) 87,872
---------------- --------------- ----------------
Net cash used in operating activities (1,671,590) (1,033,246) (3,397,882)
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (3,135,324) (11,835) (3,163,823)
---------------- --------------- ----------------
Net cash used in investing activities (3,135,324) (11,835) (3,163,823)
---------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on note payable (20,342) (23,578) (66,920)
Proceeds from long term debt 2,252,500 5,350 2,428,350
Proceeds from sale of common stock 6,728,630 971,684 8,251,314
Proceeds from capital contribution - 130,342 171,842
Proceeds from sale of warrants 72,250 40,657 115,557
---------------- --------------- ----------------
Net cash provided by financing activities 9,033,038 1,124,455 10,900,143
---------------- --------------- ----------------
Net increase in cash and cash equivalents 4,226,124 79,374 4,338,438
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 112,314 32,940 -
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,338,438 $ 112,314 $ 4,338,438
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- -------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
During the years ended December 31, 1998 and 1997 and from August 26, 1991
(inception) to December 31, 1998, the Company paid $800, $0, and $0,
respectively, in income taxes.
During the years ended December 31, 1998 and 1997 and from August 26, 1991
(inception) to December 31, 1998, the Company paid interest of $28,014,
$12,928, and $40,942, respectively.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1998, the Company issued warrants to vendors
for services valued at $2,907,530.
During the year ended December 31, 1998, the Company issued common stock to
vendors for services valued at $329,396.
During the year ended December 31, 1997, the Company converted $52,500 of
notes payable into 219,588 shares of common stock.
During the year ended December 31, 1997, the Company issued 130,707 shares of
common stock in exchange for furniture and equipment valued at $25,000.
During the year ended December 31, 1997, as part of the terms of a settlement
of a lawsuit, the Company converted an advance from an officer for $37,750
into additional paid-in capital.
During the year ended December 31, 1997, the Company issued 7,172,400 options
to purchase common stock and 3,467,520 warrants to purchase common stock
valued at $433,020 to certain non-employees for no consideration.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
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 national list as of August
1998 under the symbol USAT.
NOTE 2 - GOING CONCERN MATTERS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, during the
year ended December 31, 1998, the Company incurred a net loss of
$6,099,388. In addition, the Company is in the development stage at
December 31, 1998. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
F-8
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN MATTERS (CONTINUED)
Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the
Company's development program and its transition to the attainment of
profitable operations is dependent upon the Company obtaining adequate
debt and equity financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost
structure. In addition, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon the Company's ability
to meet its financing requirements and the success of its plans to sell
its products. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management plans to raise additional equity capital, continue to
develop its products, and look for merger or acquisition candidates.
In addition, as discussed further in Note 10, the Company is currently
under investigation by the Securities and Exchange Commission.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
F-9
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost, less accumulated
depreciation. Depreciation is provided using the straight-line method
over an estimated useful life of five years. Betterments, renewals, and
extraordinary repairs that extend the life of the asset are
capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to
assets retired are removed from the Company's accounts, and the gain or
loss on dispositions is recognized in the statement of operations.
DEVELOPMENT STAGE ENTERPRISE
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to establish a new business,
and its planned principal operations have not yet commenced. All losses
accumulated since inception have been considered as part of the
Company's development stage activities.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method
required by SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period-end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Prior to March 1996, the Company had elected to be treated as an "S"
corporation for both federal and state income tax purposes. The
shareholders of the "S" corporation were taxed on their proportionate
share of taxable income (loss). The Company will not realize any future
tax benefits of net operating losses incurred prior to March 1996.
F-10
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
For the year ended December 31, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from
net income, include foreign currency translation adjustments, minimum
pension liability adjustments, and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in
the Company's financial statements since the Company did not have any
changes in equity from non-owner sources.
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.
LOSS PER SHARE
For the year ended December 31, 1997, the Company adopted SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number
of common shares outstanding. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Because the Company
has incurred net losses, basic and diluted loss per share are the same.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-Retirement Benefits." The Company does not expect adoption of SFAS
No. 132 to have a material impact, if any, on its financial position or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for financial
statements with fiscal years beginning after June 15, 1999. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not expect
adoption of SFAS No. 133 to have a material effect, if any, on its
financial position or results of operations.
F-11
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," which
is effective for financial statements with the first fiscal quarter
beginning after December 15, 1998. The Company does not expect adoption
of SFAS No. 134 to have a material effect, if any, on its financial
position or results of operations.
In February 1999, the FASB issued SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections," which is effective for
financial statements with fiscal years beginning February 1999.
This statement is not applicable to the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
other receivables, accounts payable, and accrued expenses, the carrying
amounts approximate fair value due to their short maturities. The
amounts shown for note payable and promissory notes also approximate
fair value because current interest rates offered to the Company for
note payable and promissory notes of similar maturities are
substantially the same.
NOTE 4 - CASH AND CASH EQUIVALENTS
The Company maintains its cash deposits in one bank. Deposits at this
bank are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of December 31, 1998, uninsured portions of the balances
held at this bank totaled $4,620,674. The Company has not experienced
any losses in such accounts and believes it is not exposed to any
significant risk on cash and cash equivalents.
F-12
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 5 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1998 consisted of the
following:
<TABLE>
<S> <C>
Office equipment and furniture $ 88,003
Network equipment 3,100,820
----------------
3,188,823
Less accumulated depreciation 21,985
----------------
TOTAL $ 3,166,838
================
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 was
$11,034 and $10,107, respectively. At December 31, 1998, the network
equipment had not been placed into service. Therefore, no depreciation
had been recorded.
NOTE 6 - OTHER ASSETS
Other assets at December 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Cash held in escrow in contemplation of business acquisition $ 900,000
================
See Note 15.
</TABLE>
NOTE 7 - NOTE PAYABLE - RELATED PARTY
Note payable - related party at December 31, 1998 consisted of the
following:
<TABLE>
<S> <C>
Note payable to officer. Principal and interest are due at maturity,
November 8, 1997 (currently in default), with interest
at 12% per annum, unsecured. $ 1,430
================
</TABLE>
NOTE 8 - CONTRACT PAYABLE
The contract payable is to a former officer which resulted from a
settlement agreement dated June 5, 1998, whereby the individual
returned to the Company all of his and his related limited liability
company's shares of the Company's common stock (11,145,600 shares) in
exchange for $250,000, of which $40,000 was paid immediately. The
balance of $210,000 is to be paid to the officer in payments of $17,500
per month for a period of 12 months beginning on July 5, 1998.
F-13
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 9 - CONVERTIBLE PROMISSORY NOTES
The Company has issued unsecured, convertible, subordinated promissory
notes. The notes bear interest at 10% per annum and all principal and
interest is due and payable on May 15, 1999, but may be extended at the
investor's option to November 15, 1999. Any accrued interest, in
addition to the principal, may be converted into common stock of the
Company at a conversion price of $.625 per share. The investor has the
right to invest an additional amount equal to the original investment
prior to the due date. As of December 31, 1998, the outstanding notes
were convertible into 3,524,000 shares of common stock.
The Company issued convertible, collateralized promissory notes at a
purchase price of $50,000 per unit. The notes are collateralized by
substantially all of the Company's equipment and accrue interest at
9.25% per annum, due and payable quarterly. The principal is due on
December 30, 2001. The notes may be converted into common shares at the
rate of $0.875 per share until December 30, 1999, $1.75 per share
thereafter until December 30, 2000, and $3.00 per share thereafter
until they are due. At December 31, 1998, outstanding promissory notes
could be converted into 57,143 shares of common stock.
The terms associated with each series and the related amounts raised
and converted during the years ended December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Outstanding Outstanding
as of Raised Converted as of
December 31, During During December 31,
1997 1998 1998 1998
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
10% notes(a) $ - $ 2,202,500 $ - $ 2,202,500
9.25% notes(b) - 50,000 - 50,000
--------------- ---------------- --------------- ----------------
TOTAL $ - $ 2,252,500 $ - $ 2,252,500
=============== ================ =============== ================
</TABLE>
(a) 10% subordinated notes, due October 15, 1999.
(b) 9.25% notes, due December 30, 2001.
F-14
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASE
The Company leased certain facilities for its corporate office under a
long-term, non-cancelable operating lease agreement that expired
December 31, 1998. Rent expense was $43,168 and $35,142 for the years
ended December 31, 1998 and 1997, respectively. In addition, the
Company entered into a new non-cancelable operating lease agreement
which commenced on December 31, 1998 and expires April 30, 2000. Future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 115,316
2000 40,110
------------
TOTAL $155,426
============
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, expiring August 31,
2003 with certain key officers of the Company. These officers will
receive aggregate annual salaries over the next five years as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 710,000
2000 854,000
2001 976,000
2002 1,096,000
2003 800,000
-----------
TOTAL $ 4,436,000
===========
</TABLE>
F-15
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPTION TO LICENSE TECHNOLOGY
Effective January 24, 1997, the Company entered into an agreement with
a manufacturer of voice recording equipment for an exclusive option,
subject to limited use, to license certain technology of the Company.
Under the terms of the agreement, the Company received $50,000 in
exchange for 209,141 shares of common stock and the exclusive option
upon the execution of the agreement. The Company will receive three
additional payments of $50,000 each upon the Company meeting certain
development milestones for the technology. Upon the achievement of the
first milestone and receipt of payment, an additional 209,141 shares of
common stock will be issued. Upon completion of the second and third
(final) milestones and receipt of payments of $50,000 for each, the
Company will issue the manufacturer five-year warrants to purchase an
additional 209,141 shares of common stock at an exercise price of
$0.38.
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. 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-16
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT)
LEGAL SETTLEMENT
During the year ended December 31, 1997, the Company was one of the
defendants, along with certain of its officers/directors/shareholders,
in the settlement of a class action lawsuit brought by a former
officer/director/shareholder and other shareholders. The lawsuit was
dismissed, and the terms of the settlement provided that all 585,000
shares owned by the plaintiffs were to be repurchased by the Company
and/or the officers/directors/shareholders named as defendants for
$360,000 with the excess of the resale proceeds over the repurchase
payments going to the Company. A portion of these shares was then
resold under a special stock offering along with new shares of the
Company which resulted in the Company receiving additional paid-in
capital of $75,125 and $130,342 during the years ended December 31,
1998 and 1997, respectively, due to the proceeds of the resale of
shares exceeding the repurchase payments. There were no substantive
allegations against the Company in the lawsuit, and the Company has no
further obligation under the terms of the settlement agreement at
December 31, 1998.
WARRANTS
At December 31, 1998, there were 18,574,012 warrants outstanding that
were issued as follows:
- During the year ended December 31, 1996, 516,000 warrants were
issued to certain holders of the notes payable issued during the
year for $0.0019 each. Each warrant entitles the holder to
purchase one share of the Company's common stock at $0.3391 per
share. The warrants expired on September 30, 1997.
- During the year ended December 31, 1996, 258,000 warrants were
issued to a holder of a note payable issued during the year for
$200. Each warrant entitles the holder to purchase one share of
the Company's common stock at $0.1938 per share. These warrants
were exercised on December 18, 1998.
- During the year ended December 31, 1996, 928,800 warrants were
issued to certain shareholders as part of their purchase of the
Company's common stock during the year. 598,560 of the warrants
were issued for $0.024 each, and 330,240 warrants were issued for
no consideration. Each warrant entitles the holder to purchase
one share of the Company's common stock at $0.3391 per share.
The 330,240 warrants expired on August 30, 1997. The remaining
warrants expire on December 31, 1999. None of the remaining
warrants had been exercised at December 31, 1998.
F-17
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS (Continued)
- During the year ended December 31, 1997, 4,813,826 warrants were
issued to certain shareholders as part of their purchase of the
Company's common stock during the year. 41,280 of the warrants
were issued for $0.024 each, and 4,772,546 warrants were issued
at a price between $0.0028 and $0.0036. Each warrant entitles the
holder to purchase one share of the Company's common stock at
a price between $0.2665 and $0.3391 per share. During the year
ended December 31, 1998, 103,200 warrants were exercised in
exchange for $25,000. The remaining warrants expire on
December 31, 1999.
- During the year ended December 31, 1997, 980,400 warrants were
issued for $0.0255 each, and 3,467,520 warrants were issued to
consultants for no consideration. Each warrant entitles the
holder to purchase one share of the Company's common stock at a
price between $0.2665 to $0.3391 per share. The warrants expire
between December 31, 1999 and November 4, 2002. None of these
warrants had been exercised at December 31, 1998.
- During the year ended December 31, 1997, 144,480 warrants were
issued as part of the conversion of $40,000 of promissory notes
into demand notes for no consideration. Each warrant entitles the
holder to purchase one share of the Company's common stock at
$0.3391 per share. The warrants expire on December 31, 1999.
None of these warrants had been exercised at December 31, 1998.
- During the year ended December 31, 1998, 6,764,000 warrants were
issued to consultants for services rendered related to the
reverse acquisition of the public shell. Each warrant entitles
the holder to purchase one share of the Company's common stock at
$0.015 per share. The Company recognized expense in the amount of
$2,907,530 related to these warrants. The warrants expire on
December 31, 2003. None of these warrants had been exercised at
December 31, 1998.
- During the year ended December 31, 1998, 496,000 warrants were
sold to certain shareholders for $62,000. 80,000 of the warrants
are exercisable at $1.50 per share, and the remaining 416,000 are
exercisable at $4.00 per share. The warrants expire on December
31, 2001. None of these warrants had been exercised at December
31, 1998.
- During the year ended December 31, 1998, 239,068 warrants were
issued to certain shareholders as part of their purchase of the
Company's common stock for no consideration. Each warrant
entitles the holder to purchase one share of the Company's common
stock at $1.65 per share. The warrants expire on December 31,
2000. None of these warrants had been exercised at December 31,
1998.
F-18
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
WARRANTS (Continued)
- During the year ended December 31, 1998, 940,000 warrants were
issued to consultants in agreements for no consideration. Each of
the 920,000 and 20,000 warrants entitle the holder to purchase
one share of commons tock at $0.25 and $0.6875 per share,
respectively. The warrants expire on December 31, 2000 and 2001,
respectively. None of these warrants had been exercised at
December 31, 1998.
- During the year ended December 31, 1998, a warrant holder
exercised his rights to purchase 361,200 shares of common
stock for $75,000.
The following table summarizes certain information relative to
warrants:
<TABLE>
Weighted
Average
Shares Exercise Price
----------- --------------
<S> <C> <C>
Outstanding at 12/31/96 1,847,280 0.31
Granted 9,261,744 0.25
Expired (846,240) 0.34
----------- -----
Outstanding at 12/31/97 10,262,784 0.25
Granted 8,672,428 0.30
Exercised (361,200) 0.53
----------- -----
Outstanding at 12/31/98 18,574,012 0.27
----------- -----
----------- -----
</TABLE>
STOCK OPTION PLAN
The Company adopted the Amended and Restated Stock Option Plan (the
"Plan") during December 1997, which supercedes the previously adopted
1996 Stock Incentive Plan. Under the terms of the Plan, 25,800,000
shares of the Company's common stock have been reserved for issuance.
Non-qualified options may be issued at a price less than, equal to, or
greater than the fair market value of the common stock on the grant
date. Incentive stock options must be issued at a price not less than
100% of the fair market value of the common stock on the grant date.
Non-qualified options expire up to ten years from the grant date, and
incentive stock options expire up to five years from the grant date.
During the year ended December 31, 1997, the Company granted 7,275,600
incentive stock options to certain officers/directors, employees, and
non-employees that may be exercised at a price of $0.2665 per share.
These options vest over two years as follows: 33 1/3% on the issue
date, 33 1/3% on the first anniversary of the date of employment, and
33 1/3% on the second anniversary of the date of employment. During the
year ended December 31, 1997, the Company also granted 8,204,400
non-qualified stock options to certain employees and non-employees that
may be exercised at a price of $0.2665 per share. These options vested
immediately upon the date of issuance.
During the year ended December 31, 1997, the Company granted 8,894,000
incentive stock options to certain employees, officers, and
non-employees. The options may be exercised at $0.27 per share and vest
over two years. During the year ended December 31, 1998, the Company
also granted 2,322,000 non-qualified stock options to non-employees.
The options vest immediately and are exercisable at $0.27 per share.
F-19
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
STOCK OPTION PLAN (Continued)
The following table summarizes certain information relative to stock
options:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Incentive Stock Options Shares Price
----------------------- --------------- -----------
<S> <C> <C>
Outstanding, December 31, 1995 - $ -
Expired/cancelled - $ -
Granted 4,644,000 $ 0.39
---------------
Outstanding, December 31, 1996 4,644,000 $ 0.39
Expired/cancelled (1,548,000) $ 0.39
Granted 7,275,600 $ 0.27
---------------
Outstanding, December 31, 1997 10,371,600 $ 0.30
Expired/cancelled (2,580,000) $ 0.27
Granted 7,146,000 $ 0.29
---------------
OUTSTANDING, DECEMBER 31, 1998 14,937,600 $ 0.30
===============
EXERCISABLE, DECEMBER 31, 1998 11,364,600 $ 0.31
===============
Non-Qualified Stock Options
----------------------------
Outstanding, December 31, 1995 - $ -
Granted - $ -
---------------
Outstanding, December 31, 1996 - $ -
Granted 8,204,400 $ 0.27
---------------
Outstanding, December 31, 1997 8,204,400 $ 0.27
Expired/cancelled (2,064,000) $ 0.27
Granted 2,322,000 $ 0.27
---------------
OUTSTANDING, DECEMBER 31, 1998 8,462,400 $ 0.27
===============
EXERCISABLE, DECEMBER 31, 1998 7,301,400 $ 0.27
===============
</TABLE>
F-20
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
STOCK OPTION PLAN (Continued)
The weighted-average life of the options outstanding and exercisable at
December 31, 1998 is five years. There were 2,400,000 options available
for future grant at December 31, 1998. The exercise prices for the
options outstanding at December 31, 1998 ranged from $0.27 to $1.67,
and information relating to these options is as follows:
<TABLE>
<CAPTION>
Stock Stock Remaining
Exercise Options Options Contractual
Price Outstanding Exercisable Life
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.27 11,661,600 8,178,600 4.50
$0.39 3,096,000 3,096,000 3.00
$1.25 150,000 75,000 3.00
$1.67 30,000 15,000 3.00
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost other than that required to be recognized by Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," for the difference between the fair value of the Company's
common stock at the grant date and the exercise price of the options
has been recognized. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date
for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share for the years ended December 31,
1998 and 1997 would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Net loss as reported $ (6,099,388) $ (1,862,051)
Net loss, pro forma $ (6,599,068) $ (1,932,750)
Basic loss per share as reported $ (0.11) $ (0.04)
Basic loss per share, pro forma $ (0.12) $ (0.04)
</TABLE>
F-21
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
STOCK OPTION PLAN (Continued)
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 1998
and 1997: dividend yields of 0% and 0%, respectively; expected
volatility of 100% and 0%, respectively; risk-free interest rates
of 4.7% and 5.7%, respectively; and expected lives of 3 and 5 years.
The weighted-average exercise price was $0.29 and $0.27 at December
31, 1998 and 1997, respectively.
For options granted during the year ended December 31, 1998 where the
exercise price equaled the stock price at the date of the grant, the
weighted-average fair value of such options was $0.30, and the
weighted-average exercise price of such options was $1.32. For
options granted during the year ended December 31, 1998 where the
exercise price exceeded the stock price at the date of the grant, the
weighted-average fair value of such options was $0.10, and the
weighted-average exercise price of such options was $0.27. No
options were issued during the year ended December 31, 1998 where the
exercise price was less than the stock price at the date of the grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-22
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES
As discussed in Note 2, the Company changed its tax status effective
March 1996. The tax effects of temporary differences that give rise to
deferred taxes at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 3,407,000 $ 980,000
Less valuation allowance 3,407,000 980,000
--------------- ----------------
NET DEFERRED TAX ASSETS $ - $ -
=============== ================
</TABLE>
The valuation allowance increased by approximately $2,427,000 and
$980,000 during the years ended December 31, 1998 and 1997,
respectively. All other deferred tax assets were immaterial. No
provision for income taxes for the years ended December 31, 1998 and
1997 is required, except for minimum state taxes, since the Company
incurred losses during such years. As of December 31, 1998, the Company
had approximately $8,555,000 in federal net operating loss
carryforwards attributable to losses incurred since the change in the
Company's tax status that may be offset against future taxable income
through the year 2013.
Income tax expense was $800 and differs from the amounts computed by
applying the United States federal income tax rate of 34% to loss
before income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Computed "expected" tax benefit 34.0% 34.0%
Increase in income taxes resulting from
Change in the beginning-of-the-year balance
of the valuation allowance for deferred tax
assets allocated to income tax expense (40.0) (40.0)
State income taxes 6.0 6.0
------------ -------------
TOTAL - % - %
============= =============
</TABLE>
NOTE 13 - RELATED PARTIES
During the year ended December 31, 1997, the Company paid $224,100 and
$60,000 to consultants for services rendered. These consultants became
officers of the Company during 1997.
F-23
<PAGE>
USA TALKS.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE PERIOD FROM AUGUST 26, 1991 (INCEPTION) TO DECEMBER 31, 1998
- ------------------------------------------------------------------------------
NOTE 14 - YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue and is developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Based on the review of the computer systems, management does not
believe the cost of implementation will be material to the Company's
financial position and results of operations.
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 1998, the Company sold 6,522,400 shares of
common stock at $0.625 per share through a private placement and
received cash of $4,072,063. The Company also sold 454,940 shares of
common stock at $4.50 per share through a second private placement and
received cash of $2,047,224.
Subsequent to December 31, 1998, the note payable to officer was repaid
by the Company.
Subsequent to December 31, 1998, pursuant to an Agreement and Plan
of Reorganization under investigation 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 3,780,000 shares of the Company's
common stock and $900,000 in cash. As of March 29, 1999,
approximately 70% of the holders of CTI's issued and outstanding
shares have submitted proxy statements approving 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. Two of the Company's officers/directors and
their affiliates own an aggregate of 1,056 shares of CTI representing
approximately 13% of the total issued and outstanding shares of CTI.
Subsequent to December 31, 1998, the Company issued additional 10%
unsecured, convertible, subordinated promissory notes and received
$100,000.
Subsequent to December 31, 1998, the Company placed the network
equipment valued at $3,100,820 into service.
F-24
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 12, 1999, accompanying the
consolidated financial statements included in the Annual Report of USA
Talks.com, Inc. on Form 10-KSB for the year ended December 31, 1998. We
hereby consent to the incorporation by reference of said report in the
Registration Statements of USA Talks.com, Inc. on Forms S-8 (File No.
333-65205, effective October 1, 1998, File No. 333-70347, effective January
8, 1999 and File No. 333-70383, effective January 11, 1999).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,338,438
<SECURITIES> 0
<RECEIVABLES> 14,422
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,352,860
<PP&E> 3,188,823
<DEPRECIATION> (21,985)
<TOTAL-ASSETS> 8,419,698
<CURRENT-LIABILITIES> 4,808,083
<BONDS> 0
0
0
<COMMON> 12,753,910
<OTHER-SE> (9,142,295)
<TOTAL-LIABILITY-AND-EQUITY> 8,419,698
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 6,076,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,014
<INCOME-PRETAX> (6,098,588)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,099,388)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
