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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
Under Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File No. 0-30124
SONUS COMMUNICATION HOLDINGS, INC.
A Delaware corporation
IRS Employer Identification No. 54-1939577
1600 Wilson Blvd, Suite 1008, Arlington, VA 22209
Telephone - (703) 527- 8860
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 of 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 a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ].
Issuer's revenues for its most recent fiscal year $1,704,056.
As of March 15, 2000 the aggregate market value of the Company's voting Common
Stock held by non-affiliates of the Company was approximately $26,776,000.
As of March 15, 2000 there were 7,098,071 shares of the Registrant's Common
Stock, $.0001 par value outstanding.
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TABLE OF CONTENTS
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Part I
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Item 1. Description of Business.................................................1
Item 2. Property................................................................6
Item 3. Legal Proceeding........................................................6
Item 4. Submission of Matters to a Vote of Security Holders.....................6
Part II
Item 5. Market for the Registrant's Common Equity and Related Matters...........6
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation................................................7
Item 7. Financial Statements...................................................12
Item 8. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure...............................................13
Part III
Item 9. Directors and Executive Officers of the Registrant.....................13
Item 10. Executive Compensation.................................................16
Item 11. Security Ownership of Certain Beneficial Owners and Management.........19
Item 12. Certain Relationships and Related Transactions.........................23
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......25
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
We are a global telecommunications company that provides facilities based
carrier grade voice over IP(Internet protocol) to countries around the world for
wholesale customers. With the acquisition of Empire One Telecommunications
("EOT") announced in November 1999, we plan to extend our services into the
retail market place beginning in the second quarter of 2000. While we expect to
consummate the acquisition of EOT in late March or early April, 2000, the merger
is subject to several conditions. We can provide no assurances that we will
successfully complete the transaction within the time frame expected or at all.
Our current operations are conducted through Sonus Communications, Inc.
("Sonus"), a Virginia corporation and wholly owned subsidiary of Sonus
Communications Holdings, Inc. (the "Company"). The Company was incorporated in
the State of Delaware in April 1999 and Sonus was incorporated in the
Commonwealth of Virginia in May, 1995. The retail operations will be conducted
through a new subsidiary that will be called Empire One Telecommunications after
the completion of the acquisition.
Sonus is an FCC licensed telecommunications company that uses the public
internet as well as private internet networks to transport international voice
telephone calls. We are among the first of a growing number of service providers
to offer telephone services that utilize the internet and private internet
networks and are also among the first carriers with internet based telephone
service regarded as equivalent to that of the major international long-distance
carriers such as AT&T. We implement leading edge technology in our ongoing
effort to develop and deploy a global internet communications network providing
telephone, facsimile and data services.
Our current customers are U.S. and foreign international long-distance
carriers and pre-paid calling card companies that use our network to send their
commercial telephone traffic, including telephone, facsimile, and internet
service through the lowest cost route to international destinations.
With the addition of EOT, our principal strategy will be to focus our
resources on the development of the retail ethnic communities within the United
States served by EOT, and to expand into new ethnic markets within the U.S. EOT
currently serves residents mostly within the Chinese and Irish communities with
the largest concentration of those customers in the New York City area. With our
support, during the first quarter of 2000, EOT began to market its services to
the retail Russian community within New York. In the future, we plan to expand
its services to other ethnic markets and to expand to other U.S. cities.
Additionally, EOT is developing New York based facilities that will
enable it to provide the higher margin calls within the local New York area for
which fees can be charged ("Intralata" calls). Once operational, EOT will be
able to bypass the current local exchange carrier and offer these calls at a
lower rate. EOT expects its new Intralata capability to enhance its
competitiveness and its margins because it will no longer have to use a third
party to provide such service.
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The strategy for the international long distance telecommunications
network will be to expand the current network opportunistically into locations
where there are reasonable margins and volumes. Only on a profitable basis will
we attempt to grow our customer base, expand the number of markets served and
increase capacity in the markets we currently serve. We plan to pursue emerging
geographical markets which have been historically under-served. Management has
identified several potential emerging markets that may prove to fit this mold
but can give no assurances that the international long distance network will be
expanded in the foreseeable future.
In those international markets we enter, we hope to gain share by
offering services of the same quality as major telecommunications carriers at
lower prices than our competitors. The public internet and private internet
networks that we employ are significantly more cost-efficient than the older
technology networks currently employed by both traditional long-distance
carriers that use circuit switching and the next-generation telecommunication
companies with networks that are based on "point-to-point" leased bandwidth. We
rely on technologies and techniques aimed at driving down the costs of our
international routing, including internet routing, intelligent switching and a
refile strategy. By using the internet, we gain a significant cost advantage
while being able to provide carrier quality services.
COMPETITION
Competition for wholesale customers is primarily based on price and the
type and quality of service offered. Our ability to market our long-distance
resale services depends upon the existence of spreads between the rates offered
by us and those offered by the international exchange carriers with whom we
compete as well as those from whom we obtain service. International exchange
carriers consist of long-distance providers and other companies that provide
long-distance access. Our ability to compete in the long-distance
telecommunications market also depends, in part, on our ability to obtain
advantageous rates from international exchange carriers, and on the ability of
international exchange carriers to carry the calls that we route through them to
our networks.
The markets in which we operate are extremely competitive. Several next
generation telecommunication companies offer internet-based long-distance
service at a substantial discount to traditional commercial grade service. Many
of our competitors are significantly larger and have substantially greater
market presence and financial, technical, operational, marketing and other
resources and experience. We compete with:
- international exchange carriers that provide long-distance
access and other long-distance providers, including large
carriers such as AT&T, MCI/WorldCom and Sprint,
- foreign government-owned telephone monopolies,
- other marketers of international long-distance,
- wholesale providers of international long-distance
services,
- alliances for providing carrier services such as "Global
One", "Concert" (an alliance between British Telecom Plc
and MCI) and "Uniworld" (an alliance between AT&T and
Unisource-Telecom Netherlands, Telia AB, Swiss Telecom PTT
and Telefonica de Espana S.A.),
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- new entrants to the international and domestic
long-distance market, such as regional telephone operating
companies in the United States, who have entered or have
announced plans to enter the international long-distance
market after recent legislation authorizing entry, and new
or expected entrants to the international long-distance
market such as RWE AG in Germany and
- small resellers and facility-based exchange carriers.
SUPPLIERS AND PROVIDERS
We are dependent on third-party suppliers of telecommunications and
internet network transmission services for many of our services and do not have
long-term contracts with them. We have three principal suppliers of satellite
services and two principal suppliers of terrestrial and internet circuits. We
are dependent upon our current primary providers of leased-line network capacity
and internet access and upon third-parties to provide telecommunications
services to customers. Our ability to provide quality and reliable
telecommunications services and our ability to expand our network by providing
new voice and data lines is dependent upon the services of telecommunication and
internet service providers such as MCI/WorldCom and local access providers such
as Bell Atlantic.
MAJOR CUSTOMERS
Currently, we have five primary customers, all of which are resellers of
long distance telephone service for long-distance providers or are themselves
long distance providers. We are dependent on these five customers for nearly all
of our revenues.
PATENTS
We do not possess any patents, and we do not believe that our business is
dependent upon any patents. We are involved in various licensing arrangements.
Although these licenses are important to our business, we do not believe that
our business is dependent upon any single license or any group of licenses.
REGULATORY ENVIRONMENT
Sonus is a facilities-based carrier licensed by the Federal
Communications Commission under Section 214 of the Communications Act of 1934.
U.S. domestic interstate long-distance telecommunications services are generally
subject to regulation by the FCC. Intrastate long-distance services are
regulated by state commissions, which have varying requirements. International
telephone services are subject to regulation by both U.S. and foreign
regulators.
The FCC requires us and other international telephone service providers
to provide service without violating the laws of the countries where we operate.
We are subject to regulations relating to internet telephony in each country
where we maintain our network equipment. Some of the countries in which our
network equipment is located have uncertain and changing regulatory
environments. Local laws and regulations differ among the jurisdictions. The
interpretation and enforcement of these laws and regulations varies and is often
based on the informal views of the local government ministries which, in some
cases, are subject to influence
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by local public telephone companies. In certain of our principal existing and
target markets, there may exist certain laws, regulations or policies that
either prohibit or limit, or could be used to prohibit or limit, certain of our
services.
The 1996 Telecommunications Act substantially altered the regulatory
framework for the telecommunications industry for domestic and U.S.
international telecommunications services. The 1996 Telecommunications Act
directs the FCC to conduct a variety of rulemaking activities to implement the
Act's requirements. We cannot predict the ultimate effects of this legislation
or the outcome of the FCC rulemaking required by this Act. The legislation does
not impose substantial regulatory burdens on us at present. However, rulemaking
required by the 1996 Telecommunications Act could produce additional regulatory
requirements, including a requirement that we contribute some portion of our
revenues to subsidize mechanisms for universal service. In addition, the
legislation could increase competition and affect interconnections and costs.
Many of the overseas markets in which we currently market long-distance
telephone services are undergoing dramatic changes as a result of privatization
and deregulation. The European Union has mandated competitive markets for the
European telecommunications industry and the various European countries are at
different stages of opening their telecommunications markets. As a result of
privatization and deregulation, a new competitive environment is emerging in
which major European telephone companies, media companies and utilities are
entering the telecommunications market and forming new alliances which are
radically changing the landscape for domestic and international telephone
services. This new environment, although competitive, has allowed small
companies like us to penetrate new markets and rapidly gain market share.
The FCC and various state regulatory commissions have not made any formal
determinations regarding the regulatory status of voice telephony services
provided through use of the internet. However, America's Carriers
Telecommunications Association, an association of domestic phone carriers, filed
a petition in March, 1996 with the FCC alleging that providers of internet
telephone software are operating as telecommunications carriers and, as such,
should be subject to the FCC regulatory framework applicable to traditional
telecommunications companies. The petition seeks a declaratory ruling
establishing the FCC's authority over interstate and international
communications using the internet and an order directing that persons providing
internet phone service comply with the regulatory requirements of the
Communication Act of 1934. The petition also urges the FCC to initiate a
rulemaking proceeding to consider rules governing the use of the internet for
the provision of telecommunication services. The FCC has not taken final action
with respect to the petition.
EMPLOYEES
We have ten employees, all of which are full-time employees. Some of our
employees have entered into employment and other agreements with us. The Company
believes its relations with its employees is good.
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HISTORY
THE MERGER OF SONUS COMMUNICATIONS, INC. WITH SONUS PARK ACQUISITION,
INC.
In January 1999, Sonus Communications, Inc. entered into merger
discussions with The Park Group, Limited, a dormant public corporation. In
anticipation of the merger, The Park Group, Limited formed Sonus Park
Acquisition, Inc., a Virginia corporation, as a wholly-owned subsidiary of The
Park Group, Limited, which merged with and into Sonus Communications, Inc. on
March 4, 1999, leaving Sonus Communications, Inc. as the surviving corporation
and a wholly owned subsidiary of The Park Group, Limited. The former
shareholders of Sonus Communications, Inc. received approximately 92% of the
capital stock of The Park Group, Limited in the merger.
THE MERGER OF SONUS COMMUNICATION HOLDINGS, INC. WITH THE PARK GROUP,
LIMITED.
On April 7, 1999, The Park Group, Limited organized Sonus Communication
Holdings, Inc. as a Delaware corporation and wholly-owned subsidiary of The Park
Group Limited. On April 16, 1999, Sonus Communication Holdings, Inc. merged with
and into The Park Group, Limited, leaving Sonus Communication Holdings, Inc. as
the surviving corporation following the merger. As a consequence of the merger,
Sonus Communications, Inc. became a wholly-owned subsidiary of Sonus
Communication Holdings, Inc. Shares of The Park Group, Limited were exchanged
for shares of Sonus Communication Holdings, Inc. on a one-for-one basis in the
merger. The sole purpose of the merger was to reincorporate in the State of
Delaware.
HISTORY OF THE COMPANY'S PREDECESSOR.
The Park Group, Limited was originally incorporated as American Ventures,
Inc. on January 24, 1986 under the laws of the State of Colorado. American
Ventures, Inc. was formed as a "blind pool," in which investors entrusted
management to apply the offering proceeds to acquire or merge with a suitable
operating company. In August 1986, American Ventures, Inc. closed an initial
public offering of it stock. In February 1987, American Ventures, Inc. acquired
The Park Group, Ltd., a mortgage company, as a wholly owned subsidiary. American
Ventures, Inc. then changed The Park Group, Ltd.'s name to "Park Group Mortgage
Company, Ltd.," and changed its own name to "The Park Group, Ltd." The Park
Group, Limited had been dormant for at least three years prior to the merger
with Sonus Communication Holdings, Inc.
MERGER WITH EMPIRE ONE TELECOMMUNICATIONS
In November 1999, the Company entered into a merger agreement with Empire
One Telecommunications, Inc. We have received approvals from the Federal
Communication Commission, the New York State Public Service Commission and other
regulatory agencies, and the shareholders of Empire One Telecommunications, Inc.
have voted to approve the merger. In the event we close the merger, we will
issue 1,065,857 shares of common stock to the current stockholders of Empire One
Telecommunications, Inc. We anticipate that the merger will close before the end
of the first quarter of 2000, but can provide no assurances in that regard.
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ITEM 2. PROPERTY
We lease and maintain our corporate headquarters in 2,027 square feet of
office space located at 1600 Wilson Blvd., Suite 1008, Arlington, Virginia
22209. At December 31, 1999, we leased or owned telecommunications equipment
located in Holmdel, New Jersey, New York City, New York, Los Angeles,
California, Shanghai, China and Tbilisi, Georgia. The value of the equipment we
currently own is approximately $721,000. Subsequent to December 31, 1999, we
converted approximately $375,000 owed to the manufacturer of the equipment into
a lease secured by the equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding required to be
described in this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded over-the-counter and quoted on the bulletin
board maintained by NASDAQ under the symbol "SNHD" on a limited and sometimes
sporadic basis. Quoting began in August of 1999. The reported high and low
prices for the common stock are shown below for the indicated periods through
December 31, 1999. The prices presented are the low bid and high ask prices that
represent prices between broker-dealers and do not include retail mark-ups and
mark-downs or any commission to the broker-dealer. The prices do not necessarily
reflect actual transactions. As of March 20, 2000, there were approximately 274
stockholders of record of the common stock.
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Closing
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Low High
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1999
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Third Quarter 1/2 3
Fourth Quarter 2 1/4 4 1/2
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RECENT SALES OF UNREGISTERED SECURITIES
As part of a $2.5 million private offering of our common stock, we sold
an aggregate of 1,851,504 shares of common stock in November 1999 and January
2000 for approximately $2,499,500 to 43 sophisticated individual and corporate
accredited investors, reflecting a $1.35 per share offering price. L. Flomenhaft
& Co., Inc. and Hudson Allen & Co. acted as placement agents in connection with
this offering. Securities were sold in the offering at three separate closings
conducted on November 22, 1999, January 5, 2000 and January 26, 2000. We sold
418,140 shares of common stock on November 22, 1999 for approximately $564,500,
1,088,939
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shares of common stock on January 5, 2000 for approximately $1,470,000, and
344,425 shares of common stock on January 26, 2000 for approximately $465,000.
The placement agents received warrants to purchase 62,720 shares of common stock
at $1.35 per share and $56,449 in cash in connection with the closing on
November 22, received warrants to purchase an aggregate of 143,378 shares of
common stock at $1.35 and $147,000 in cash in connection with the closing on
January 5, 2000 and warrants to purchase an aggregate of 51,664 shares of common
stock and approximately $46,500 in cash in connection with the closing on
January 26, 2000.
We relied on Section 4(2) of the Act, and on Rule 506 of Regulation D
promulgated thereunder, in issuing the shares in the $2.5 million offering
without registering the offering under the Act. We relied upon representations
and warranties of the investors contained in the subscription agreements entered
into with the private placement investors, to the effect that such investors
were accredited investors and on investor questionnaires completed by such
investors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition and results of
operations of our company should be read in conjunction with the financial
statements and the notes to those statements and the other financial information
included elsewhere in this Form 10-KSB. The Private Securities Litigation Reform
Act provides a "safe harbor" for forward-looking statements. Certain statements
included in this Form 10-KSB are forward-looking and are based on the Company's
current expectations and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from results expressed or
implied in any forward-looking statements made by, or on behalf of, the Company.
The Company assumes no obligation to update any forward-looking statements
contained herein or that may be made from time to time by, or on behalf of, the
Company.
OVERVIEW
We are currently a provider of telecommunications services that utilize
the public internet as well as private internet networks. Since we began
offering long distance services in late 1998, our strategy has been to establish
routes into underserved geographic markets such as countries that were formerly
part of the Soviet Union (e.g. Republic of Georgia) and developing countries in
Asia, the Pacific Rim and the Caribbean. This strategy involved establishing a
relationship with a local organization in the destination country that would own
all necessary equipment in that country as well as establish any necessary
working relationships with the local phone company or other companies. More
recently, we have adjusted our strategy and are establishing ourselves both as a
significant provider of "pin-drop" quality voice-over-internet telephone service
to several international markets and as a growing competitive local exchange
carrier providing service to ethnic markets in the U.S.
As a result of this strategy, we entered into an agreement, which is
expected to close in late March or early April 2000, to acquire Empire One
Telecommunications, Inc., a competitive local exchange carrier located in New
York City focusing on the Chinese community. We expect to use EOT to market to
other ethnic communities such as the Russian communities in the U.S.
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This approach will integrate the existing long distance circuits with local
communications services.
Since we began offering long distance telecommunications services, we
have incurred net operating losses and expect to incur additional losses for the
foreseeable future, primarily as a result of increased sales and marketing
efforts. As of December 31, 1999, the Company had accumulated net losses of
approximately $2,199,525.
REVENUES
We began our long distance offerings through a circuit we established
into the Republic of Georgia. We have traditionally sold this capacity to other
telecommunications providers that wholesale the service to carriers within the
United States. Most of the revenue was from these customers sending voice, fax
and other telecommunications that terminated in the Republic of Georgia with
some also being "refiled" to other locations in the former Soviet Union such as
Moscow and St. Petersburg. In addition, we established a relationship with an
internet service provider to service its needs for a circuit from the Republic
of Georgia into the United States. For 1999, 61% of our revenue, or $1,035,000
was generated from telecommunications services carried over this circuit. There
was no revenue from this circuit until the fourth quarter of 1998.
During the second quarter of 1999, we established a small presence in
China. We learned that we could not continue to provide services on a profitable
basis with the relationships we initially developed. As a result, we generated
only a small amount of revenue before the decision was made to stop providing
services over this route until different relationships could be located. We are
pursuing new relationships and hope to offer services into China again on a
profitable basis during the first half of 2000, but can provide no assurances in
that regard. For 1999, only 8% of our revenue, or $136,000 was recognized from
services terminating in China.
We established a network circuit in Southwest Asia during the third
quarter of 1999. Due to political turmoil in Southwest Asia, we were not able to
terminate traffic into that region from November 1999 through mid-March, 2000.
While we have re-established our Southwest Asia operations on a limited basis,
we can provide no assurances that our Southwest Asia operations can be fully
restored to earlier levels or that we can maintain the operability of that
circuit. This interruption in the operation of our Southwest Asia circuit could
have a material adverse effect on our revenues and financial condition. As a
result of the locations we target, we expect that events will occur from time to
time that may disrupt our ability to use any individual circuit for
indeterminate periods of time.
With the acquisition of Empire One, we will focus expansion in the future
on increasing revenues by developing services centered around various ethnic
communities in the United States. These services will include local, long
distance, internet and other communications needs of these various communities.
In addition, we will continue to opportunistically look for international
locations where telecommunications services can be provided on a profitable
basis. Because these will be pursued only as opportunities arise, the timing of
additional network circuits, if any, can not be determined. Such opportunities
may exist in locations as diverse as Cuba, Kazakhstan, Central Africa, or other
countries that are currently underserved.
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DIRECT OPERATING EXPENSES
Direct operating expenses consist primarily of network costs associated
with the routing and termination of customers' traffic. These include:
-- amounts paid to carriers and internet service providers to
carry our traffic on both the internet and traditional
phone networks,
-- amounts paid to our international vendors to terminate our
traffic at their circuits, and
-- costs associated with leased lines and satellite routes
connecting our circuits directly to the internet or to
connect to circuits of our international vendors.
We expect our direct operating expenses to increase in absolute terms
over time to support our customer base. Some of these costs are fixed while
other costs vary on a per minute basis. Therefore, there may be some volatility
in our direct operating costs as a percentage of revenues, particularly as we
expand our network.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of salaries of our employees
and associated benefits, rent, travel and professional fees including those of
accountants, lawyers and other business consultants. A portion of our general
and administrative expenses include the costs associated with technical support
and customer service, consisting primarily of the salaries of employees. We
expect technical support and customer support expenses to increase over time to
support new and existing customers and additions to the network. We expect
general and administrative costs to increase to support our growth as we
establish a larger organization to implement our business plan.
RESULTS OF OPERATIONS
For the year ended December 31, 1999, we had revenues of $1,704,000
compared to $287,000 for the year ended December 31, 1998. During 1998, we began
installing our network with the first revenues generated from telecommunications
services occurring in the fourth quarter of 1998. Revenues prior to the fourth
quarter of 1998 were mostly from consulting services. As we have focused on
telecommunications services and expanding our network, revenues from consulting
have decreased with no consulting service revenues during 1999. The first
circuit installed was to the Republic of Georgia which began generating revenues
in the fourth quarter of 1998. In 1999, the circuit to the Republic of Georgia
generated 61% of the total revenue.
During the first quarter of 1999, we began installing the network to
China. This circuit began carrying traffic during the second quarter of 1999.
Since beginning service to China, we have experienced significant declines in
prices due to competitive pressures. As a result, the
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original circuit to China has become uncompetitive. Consequently, we made the
decision to take the circuit out of service until a new relationship can be
established that will result in a profitable circuit and be competitive in the
marketplace. During 1999, the China circuit generated only 8% of total revenues
with most of that coming during the second quarter.
At the end of the third quarter, we established a circuit in Southwest
Asia. This circuit has carried telecommunications traffic sporadically since
being established, due to political unrest. We expect the circuit to be
operational again before the end of the second quarter of 2000, although the
revenue from it may be limited. We also expect to add additional circuits in
other locations in the last part of 2000 if the opportunity arises in locations
that can be operated profitably. Most of the focus during 2000 will be in
building the ethnic markets of Empire One in the United States.
We had direct operating expenses of $1,951,000 for year ended December
31, 1999, compared to direct operating expenses of $268,000 for the year ended
December 31, 1998. These expenses relate to the installation and operation of
the network. For 1999 and 1998, the call termination, satellite utilization fees
and other costs of carrying traffic accounted for 83% and 85%, respectively, of
direct operating expenses with such items as depreciation and equipment
maintenance costs accounting for the remainder of the direct costs.
General and administrative expenses were $1,237,000 for the 12 months of
1999 compared to $94,000 for the 12 months of 1998. This increase is directly
attributable to the increase in wages since the two founders in 1998 took
minimal salaries based on the time they spent on the business in 1998 as
compared to staffing of nine at December 31, 1999 and all associated costs of
establishing and maintaining an office. Because operations during 1998 were
minimal, the founders spent little time on operations. In addition, we had an
agreement with a third party to provide services on an as needed basis for time
spent on operations. We expect that in order to increase capacity of the current
installed locations and to expand into additional locations, as well as to
obtain the administrative support necessary in connection with being a public
company, a significant investment in both equipment and personnel will be
needed. The result will be to increase operating expenses with no assurance of
any return on investment.
On March 4, 1999, Sonus Communications Inc. merged with and into Sonus
Park Acquisitions, Inc., a newly formed wholly owned subsidiary of The Park
Group, Limited. Sonus Communications, Inc., which was the surviving entity,
became a wholly owned subsidiary of The Park Group, Limited and the only asset
of The Park Group, Limited. On April 7, 1999, The Park Group, Limited organized
Sonus Communication Holdings, Inc. as a Delaware corporation and a wholly owned
subsidiary of The Park Group, Limited. On April 16, 1999, Sonus Communication
Holdings, Inc. merged with and into The Park Group, Limited leaving Sonus
Communication Holdings, Inc. as the surviving corporation. Shares of The Park
Group, Limited were exchanged for shares of Sonus Communication Holdings, Inc.
on a one-for-one basis. The sole purpose of the merger was to re-incorporate in
Delaware.
The total merger related costs of $262,000 include $238,000 for costs
related to the Park/Sonus merger consisting of legal fees of approximately
$121,000, investment banking fees of $104,000, and accounting fees and other
miscellaneous fees of $13,000. In addition, we
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incurred $25,000 for investment banking fees during the third quarter of 1999
related to the acquisition of Empire One. We expect to incur additional
investment banking fees during the first quarter of 2000 due to the merger with
Empire One. It is expected that these fees will be capitalized as part of the
acquisition of Empire One. Please see the Footnotes to Consolidated Financial
Statements for additional information on the mergers.
As a result of the limited revenue, the increased costs associated with
the expansion and the costs of the merger, we had a net loss of $1,751,000 for
1999. This is compared to a net loss of $81,000 for 1998 when operations were
limited.
LIQUIDITY
At December 31, 1998, we had cash of $1,000, negative working capital of
$312,000 and negative shareholders' equity of $181,000. During 1999, we have
been successful in completing four separate rounds of financing.
The first round was completed in January 1999 when we sold 750,000 shares
of our common stock in a private offering realizing net proceeds aggregating
$627,000. In May 1999, we completed the second round by selling $575,000 in
convertible debentures. These Debentures were automatically converted under the
terms of the agreement to common stock with the sale of the Equity Unit offering
in August 1999. The third round of financing consisted of the sale of Equity
Units comprised of one share of our common stock and one warrant exercisable for
one share of common stock at an exercise price of $3.00. We closed the minimum
under the Equity Unit offering in August 1999 by selling 250,000 units thereby
netting $435,000 in cash after investment banking fees and other expenses. The
final round in 1999 was completed in November 1999 with the sale of 418,140
shares of common stock at $1.35 per share, and we realized net proceeds of
$502,000. This final round was the first traunch of a $2.5 million offering and
the remainder of the offering closed in January 2000. See the Footnotes to
Consolidated Financial Statements included in this Form 10-KSB for more details
related to these transactions.
Even though we have been successful in completing the financings noted
above, prior to the financing completed in January 2000, we had negative working
capital of $219,000 at December 31, 1999 with positive shareholders' equity of
$412,000. As a result, we will need to continue our efforts to raise capital or
find other sources of funds to finance our growth and the continued losses. As
part of this effort, on September 29, 1999, we entered into an equipment leasing
arrangement with our network equipment supplier. The agreement provides for a
total available facility of $2.2 million. Under the arrangement, we leased
$200,000 of network equipment in the third quarter accounted for as a capital
lease. In addition, subsequent to December 31, 1999, the vendor equipment
payable of $365,000 was put under this lease facility thereby providing
additional working capital.
As noted in the footnotes to the Consolidated Financial Statements, we
signed a merger agreement on November 15, 1999 to acquire Empire One
Telecommunications. The acquisition, when completed, will result in the issuance
of approximately 1,066,000 shares of our common stock in exchange for all the
outstanding common stock of Empire One. Regulatory and
11
<PAGE> 14
shareholder approval was obtained during the first quarter of 2000. In
conjunction with the signing of the merger agreement, we received the first
traunch of the $2.5 million offering noted above.
In May 1999, we filed a Form 10-SB with the Securities and Exchange
Commission to register our common stock under the Securities Exchange Act of
1934, as amended. The Form 10-SB became effective in July 1999 and our stock
began trading publicly on the NASDAQ over the counter bulletin board in August
1999. Besides the monies we expect to raise in conjunction with the Empire One
acquisition, we believe it will be necessary to continue to raise additional
funds in order to have enough cash to pay for our expected expansion and
continue our operations. With the aid of our investment banker, Hudson Allen &
Co., we are anticipating a round of financing by mid-year of 2000 that is
expected to be a minimum of $5 million and could be significantly higher based
on our operations at the time of the financing, although no assurances can be
provided that such funds can be obtained on terms favorable to us or at all.
We believe that the proceeds from the sale of debt and equity securities
during 2000, combined with operating revenues, will be sufficient to allow us to
conduct our operations during the fiscal year ending December 31, 2000.
During 1999, we acquired $589,000 of equipment, including $574,000 for
our network. During 1999, we and our vendors installed equipment in Southwest
Asia, China and the United States as part of the effort to increase our network
capabilities. The network equipment was financed by the manufacturer with a
portion under capital lease at December 31, 1999 and the remainder put under
lease during the first quarter of 2000. The additional equipment financing has
been offset by payments made to the manufacturer on equipment acquired and
financed in 1998 resulting in an increase of $8,000 in the amount owed the
manufacturer at December 31, 1999.
As part of the expenses associated with the mergers as noted above, we
hired L. Flomenhaft & Co., Inc. as a consultant. The relationship extends for
two years. As a fee for these services, L. Flomenhaft & Co. agreed to take
shares of our common stock valued at $90,000 in lieu of cash.
As noted above, the acquisition of subscribers for Empire One after the
merger and the opportunistic expansion of the current network requires
substantial investment of both equipment and personnel. We expect that we will
have to continue to raise funds in both the private and public markets to have
enough cash to pay for this expected expansion and to continue our operations.
We believe that our ability to raise money in the public sector will enhance
these efforts although there can be no assurance that this will be the case or
that any public offering of our securities will be made.
ITEM 7. FINANCIAL STATEMENTS
SEE "CONSOLIDATED FINANCIAL STATEMENTS" ON PAGES F-2 THROUGH F-18 OF THIS ANNUAL
REPORT ON FORM 10-KSB
12
<PAGE> 15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and titles of all of our directors and executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ----
<S> <C> <C>
Charles W. Albo 62 Chairman and Executive Vice President, Director
W. Todd Coffin 32 President, Chief Executive Officer, Director
Nana Maraneli 53 Vice-Chairman; Executive Vice President; Secretary; Director
Richard D. Rose 45 Chief Financial Officer; Treasurer
Stephen Albo 35 Chief Technology Officer
Raleigh Coffin 66 Director
John Theodoracopulos 34 Director
Ronald Frankum 64 Director
</TABLE>
Each director is elected to hold office until the next annual meeting of
stockholders and until his or her successor is elected and qualified. Each
officer serves at the discretion of the Board of Directors, subject to any
applicable employment agreements.
CHARLES W. ALBO, CHAIRMAN, EXECUTIVE VICE PRESIDENT, is our co-founder and has
been Chairman and a director of Sonus Communication Holdings, Inc. and Sonus
Communications, Inc. since April 7, 1999, served as Chief Executive Officer of
Sonus Communications, Inc. from its incorporation in May, 1995 until April 14,
1999, and has been a director of the Sonus Communications, Inc. since May, 1995.
Mr. Albo oversees our existing operations and is responsible for managing and
developing new domestic customer relationships and new foreign partnership
relationships. Mr. Albo's background is in strategic planning, analysis and
management. In 1994, together with Nana Maraneli, Mr. Albo co-founded Goodwill
Communications, Ltd., a company which installed and is operating international
telecommunications services linking the Nation of Georgia to the United States.
From 1994 through 1999, Mr. Albo served as Goodwill Communications' president.
From 1992 until 1995, Mr. Albo served as President of Management Vision
Partners, Inc., a company which assisted high technology companies in the
development of next generation products, non-defense markets and international
business.
13
<PAGE> 16
W. TODD COFFIN, CHIEF EXECUTIVE OFFICER, PRESIDENT, DIRECTOR, joined Sonus
Communication Holdings, Inc. and Sonus Communications, Inc. as CEO on April 14,
1999, as President on April 19, 1999 and as a Director on April 20, 1999. Mr.
Coffin's background is in finance, telecommunications and enabling technologies.
From March 1997 to April 1999, Mr. Coffin worked in investment banking for
Tanner Unman Securities where he assisted in the financing of telecommunications
companies including IDT Corp. and Amnex and technology companies including
Fonix, Globalink and SuperConductor Technologies. From June 1995 to May 1997,
Mr. Coffin was the Investment Director for ETOM Technologies, a venture-backed
technology company. From April 1993 to May 1995, Mr. Coffin was with Alex Brown
& Sons. From 1991 to 1993, Mr. Coffin was with Smith Barney, Harris, Upham.
NANA MARANELI, VICE-CHAIRPERSON, EXECUTIVE VICE PRESIDENT, SECRETARY, is our
co-founder and has been Vice Chairperson, Executive Vice President, Secretary
and a director of Sonus Communication Holdings, Inc. since April, 1999, was
President of Sonus Communications, Inc. from May 1995 until April 20, 1999, and
has been a director of Sonus Communications, Inc. since May 1995. Ms. Maraneli
oversees our operations in the former Soviet Union and is responsible for the
development of new telecommunication opportunities in Eastern Europe and Asia.
Ms. Maraneli was born in Tbilisi, Georgia and is a permanent resident of the
United States. She has ten years experience generating business partnerships
between entities in the U.S., Tbilisi, Moscow, Paris, Vienna, Amsterdam, and
London. Under George Soros' direction, Ms. Maraneli organized the development of
the Soros Foundation's Georgian branch and served as its first executive
director. In 1994, Ms. Maraneli co-founded Goodwill Communications, a Georgian
telecommunication service provider. From 1993 through 1995, Ms. Maraneli served
as Vice President of Management Vision Partners, Inc. While at Management Vision
Partners, Inc., Ms. Maraneli assisted other companies in identifying joint
venture partners and negotiating joint venture agreements for enterprises in
Eastern Europe and the former Soviet Union, including joint ventures in Karelia
for forest products, in Georgia for bank card clearing and in Bulgaria for
cellular and paging services.
RICHARD D. ROSE, CHIEF FINANCIAL OFFICER, TREASURER, joined Sonus Communication
Holdings, Inc. and Sonus Communications, Inc. on April 20, 1999 as Chief
Financial Officer and Treasurer. From March 1998 until April 1999, Mr. Rose
served as Vice President of Finance and Administration of Visual Mining, Inc., a
venture-backed start-up software company. From October 1997 to March 1998, Mr.
Rose was the Chief Financial Officer for the Netrix Corporation, a
telephone/data switch manufacturer. From January 1997 through September 1997,
Mr. Rose ran his own financial services company consulting for high-technology
start-ups. Prior to January 1997, for more than five years, Mr. Rose was Chief
Financial Officer of Penril Data Communication Networks, Inc., a manufacturer of
data communications equipment.
STEPHEN ALBO, CHIEF TECHNOLOGY OFFICER, has been our Chief Technology Officer
since January 1999. He has over 14 years of project management, systems
analysis, design, development and maintenance experience at all levels. He also
has experience in telecommunications, software development and business
management. Since January 1999 Mr. Albo has been employed as our Chief
Technology Officer, responsible for system development, implementation and
maintenance of all voice/data networks. From September 1996 until
14
<PAGE> 17
January 1999, Mr. Albo was the Director of Information Systems for CommTek
Communications Corp., where he oversaw development and operations of all
corporate information systems functions including production of printed and
electronic magazines, and EDI partnerships. From May 1994 until September 1996
he was Director of Information Systems/Manager of Technical Support for
Intrafed, Inc., where he was in charge of development and operations of all
corporate information systems functions. Mr. Albo is the son of Charles W. Albo,
Chairman and Executive Vice President of Sonus Communication Holdings, Inc. and
Sonus Communications, Inc.
RALEIGH COFFIN, DIRECTOR, has been a director of Sonus Communication Holdings,
Inc. and Sonus Communications, Inc. since April 19, 1999. He has extensive
management experience in several major corporations. Mr. Coffin is currently
Director and Vice Chairman of InMedia Presentations Inc. (listed on the Montreal
Exchange as IMD) and is responsible for the strategic, marketing and funding
needs for InMedia. InMedia sells computer software which provides for the
digitization of film and other images for enhancement, e-mailing or multi-media
presentations. Mr. Coffin served as President and CEO of ETOM Technologies
Corp., a company that performed research and development for next generation DVD
and video on demand technology, from 1992 until 1997. Mr. Coffin served as
President and Founder of The Alternate Network, providing original programming
and interactive phone services. He has served as Brand Manager at Procter &
Gamble, assistant to the President and Chairman and as a division manager at
General Foods and President of International Standard Brands. In addition, Mr.
Coffin had responsibility for all operations outside the U.S. as President of
Playtex International.
JOHN H. THEODORACOPULOS, DIRECTOR, joined Sonus Communication Holdings, Inc. in
April, 1999. Since 1989, Mr. Theodoracopulos has worked for National Shipping &
Trading Corp., a tanker and bulk carrier operator. Based in New York, New York,
he oversees the fleet's worldwide commercial operations. He also advises their
overseas affiliates on investments in real estate, tourism and agriculture.
RONALD FRANKUM, DIRECTOR, was appointed to the Board of Directors on September
27, 1999. Mr. Frankum is the founder, president and chairman of IntelPhone
Holdings, Ltd., a telecommunications company started in 1993 to develop business
opportunities in GSM technologies, manufacturing and high technology products on
a global basis. From July 1996 to December 1998, Mr. Frankum was a member of the
board of directors of Digitel, a telecommunications company which conducted
trials for a nationwide 900 GSM digital cellular telephone system in the
Republic of Slovenia. As a co-founder of PMCL Mobilink, Mr. Frankum helped to
create the Motorola mobile phone system in Southwest Asia. In 1994, Mr. Frankum
was the Vice-Chairman of the GSM Association and in 1995 served as the Chairman
of the North American interest group of the GSM Association. From February 1986
to August 1997, Mr. Frankum served as Chairman of the Board of Saif Telecom
Ltd., a southwest Asian company involved in the development of
telecommunications services and was Managing General Partner of Cellular Fund
One, an asset management company that raised capital and built and operated
rural cellular telephone systems in the United States. Mr. Frankum is a former
Deputy Science Advisor to President Reagan responsible for national
telecommunications planning, emergency preparedness and network modernization.
15
<PAGE> 18
ITEM 10. EXECUTIVE COMPENSATION.
CASH COMPENSATION OF EXECUTIVE OFFICERS
The following information relates to compensation paid to our Chief
Executive Officer and to the three other most highly-compensated individuals who
were serving the Company as executive officers at the end of 1999. Herbert R.
Donica served as the chief executive officer of The Park Group, Limited, our
predecessor, during the last three fiscal years, until February 26, 1999.
Neither Mr. Donica nor any other executive officer received compensation for
their services as executive officers of The Park Group, Limited during the last
three fiscal years.
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------------
Securities
Underlying
Name and Principal Position Fiscal Year Salary Bonus Options/SAR
- ------------------------------------- --------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
W. Todd Coffin, Chief
Executive Officer (1) 1999 $80,000 $37,500 0
Charles W. Albo, Chief
Executive Officer,
Executive Vice
President (2) 1999 $86,534 0 0
Steven Albo, Chief
Operating Officer 1999 $108,000 0 200,000
</TABLE>
- ------------
(1) Mr. Coffin served as Chief Executive Officer of the Company from April,
1999 through the end of 1999.
(2) Charles W. Albo served as our Chief Executive Officer from our inception
until mid-April, 1999, and as our executive vice president from April,
1999 through the remainder of the 1999 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents information relating to option and warrant
grants made during 1999 to our named Executive Officers and the potential
realizable value of each grant assuming appreciation of our common stock at an
annual rate of either 5% or 10% over the stated term of the option.
16
<PAGE> 19
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------------------------------
Number of Shares Percentage of Options
Underlying Options Granted to Employees Exercise or Base
Name Granted in Fiscal Year (1) Price Per Share Expiration Date
- ----------------------- ---------------------- ----------------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
W. Todd Coffin 0 0 -- --
Charles W. Albo 0 0 -- --
Steven Albo 100,000 (2) 18.83 $1.50 6/10/09
75,000 (3) 14.12 1.00 4/19/04
75,000 (4) 14.12 1.00 4/19/04
</TABLE>
(1) Percentages calculated based on aggregate of 306,000 employee stock
options granted and 225,000 warrants issued to employees.
(2) Represents stock options issued pursuant to our employee stock option
plan, of which 41,667 options are vested and presently exercisable.
(3) Represent common stock purchase warrants which are all vested and
presently exercisable.
(4) Represent common stock purchase warrants, of which 35,000 are currently
vested or will vest within 60 days.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table presents certain information about stock options
exercised by our named Executive Officers during 1999 and the value of
unexercised options held by them at the end of 1999.
<TABLE>
<CAPTION>
No. Shares Value of Unexercised
Shares Acquired Underlying Unexercised In-the-Money Options
Name upon Exercise Options at December 31, 1999 At December 31, 1999 (1)
- ---------------- ------------------------------- --------------------------------------- -----------------------------------
No. Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ----------- ------------------ ------------------ ------------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
W. Todd Coffin -0- -0- -0- -0-
Charles W. Albo -0- -0- -0- -0-
Steven Albo -0- -0- 151,667 98,333 $273,400 $161,600
</TABLE>
(1) The closing price of the Company's common stock at the end of fiscal year
1999 was $2.94 per share.
17
<PAGE> 20
LONG TERM INCENTIVE PLAN DURING FISCAL YEAR
We did not make any long term incentive plan awards to any executive
officers or directors during the fiscal year ended December 31, 1999.
EMPLOYMENT AGREEMENTS
We entered into a three-year employment agreement with Charles W. Albo as
of April 15, 1999. The agreement provides that he will serve as Executive Vice
President and Chairman of Sonus Communication Holdings, Inc. He has agreed to
forgo any salary during the first year of the term (through May 1, 2000) but
will become entitled to receive salary thereafter equivalent to that of
similarly situated executives, to be not less than $84,000 per year. The
agreement also provides that Mr. Albo shall be entitled to participate in
benefit programs available to similarly situated senior management employees
from and after April 15, 2000. We may terminate Mr. Albo's employment agreement
for "cause" or upon a finding of disability under the agreement. The employment
agreement also contains provisions pursuant to which Mr. Albo has agreed not to
compete with us.
We entered into a one-year employment agreement with Steven Albo as of
February 1, 2000. The agreement provides that he will serve as Vice President of
Operations and Chief Technical Officer of Sonus Communication Holdings, Inc. He
agreed to a salary of $84,000 per year plus a bonus of $31,000 at December 31,
1999 provided he was an employee on that date.
DIRECTORS' COMPENSATION
The directors do not receive any fees for their services in such
capacity. However, each Director is reimbursed for all reasonable and necessary
costs and expenses incurred as a result of being a Director.
On June 10, 1999, we adopted the 1999 Director Stock Incentive Plan,
which was approved by a majority of the stockholders on July 12, 1999. Under the
terms of the 1999 Director Stock Incentive Plan, which expires on June 10, 2009,
our non-employee directors may be granted non-statutory stock options at an
exercise price equal to 100% of the fair market value on the date of grant. No
option will be exercisable more than ten years from the date of grant. We have
reserved 350,000 shares for issuance under the 1999 Director Stock Incentive
Plan. As of the date of this prospectus, options to purchase 50,000 shares have
been granted to Ronald Frankum under the 1999 Director Stock Incentive Plan
entitling Mr. Frankum to purchase 50,000 shares at an exercise price of $2.00
per share.
EMPLOYEE STOCK INCENTIVE PLAN
On June 10, 1999, we adopted the 1999 Stock Incentive Plan which was
approved by a majority of the stockholders on July 12, 1999. Under the terms of
the 1999 Stock Incentive Plan, which expires on June 10, 2009, employees may be
granted incentive stock options, non-statutory stock options and restricted
stock awards. The option price of shares of common stock generally will not be
less than 100% of the fair market value on the date of grant or 110% of fair
18
<PAGE> 21
market value in the case of a grant to a 10% or greater shareholder. No option
will be exercisable more than ten years from the date of grant. We have reserved
500,000 shares for issuance under the 1999 Stock Incentive Plan. As of the date
of this prospectus, employees had been granted 306,000 shares. Options typically
vest quarterly over a three year period unless the Board of Directors in its
discretion provides otherwise. Options shall become fully vested upon a "change
of control" as defined in the 1999 Stock Incentive Plan. The Board of Directors
has discretion to set the terms and conditions of options; including the term,
exercise price, and vesting conditions, if any; to determine whether the option
is an incentive stock option or a non-qualified stock option; to select the
persons who receive such grants; and to interpret and administer the 1999 Stock
Incentive Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth certain information regarding the beneficial
ownership of the common stock, the only class of capital stock authorized, as of
March 9, 2000, by:
(i) each person we know to be the beneficial owner of more than 5% of the
outstanding shares of common stock,
(ii) each of our directors and the Chief Executive Officer, and
(iii) all directors and executive officers as a group. Unless otherwise
indicated, each of the stockholders listed below has sole voting and investment
power with respect to the shares beneficially owned.
19
<PAGE> 22
BENEFICIAL OWNERS OF MORE THAN 5%
OF OUR COMMON STOCK
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- ----------------------- ----------------
<S> <C> <C>
Charles W. Albo 1,044,431(1) 17.3%
1600 Wilson Blvd
Suite 1008
Arlington, VA
22209
Nana Maraneli 1,000,000(2) 16.6%
1600 Wilson Blvd.
Suite 1008
Arlington, VA
22209
Evansville Ltd. 545,370 9%
Attn: Thomas A Huzer
Quadrant Management, Inc.
720 5th Avenue
New York, NY
10019
L. Flomenhaft & Co., Inc. 1,051,255(3) 15.1%
225 West 34th Street
Suite 2008
New York, NY
10122
</TABLE>
- ----------------------
(1) Includes 1,000,000 shares owned of record by Albo Limited Partners, a
Virginia limited partnership, of which Mr. Albo is general partner.
(2) Includes 950,000 shares owned of record by Maraneli Limited Partners, a
Virginia limited partnership, of which Ms. Maraneli is general partner.
(3) Includes 120,000 shares of outstanding common stock and fully vested
common stock purchase warrants (i) issued January 21, 1999 to purchase
78,750 shares of common stock at an exercise price of $1.00 per share,
(ii) issued January 21, 1999 to purchase 487,500 shares of common stock
at an exercise price of $.92 per share, (iii) issued August 3, 1999 to
purchase 86,250 shares of common stock at an exercise price of $1.00 per
share, (iv) issued August 3, 1999 to purchase 25,500 shares of common
stock issuable at an exercise price of $3.00 per share, (v) issued August
3, 1999 to purchase 32,812 shares of common stock at an exercise price of
$2.00 per share, and (vi) issued November 22, 1999, January 5, 2000 and
January 27, 2000 to purchase 220,443 shares of common stock at an
exercise price of $1.35 per share. See "Description of Securities,
Description of Warrants".
20
<PAGE> 23
The following table sets forth the beneficial ownership of common
stock of the Directors and Executive Officers based on 6,032,214 shares of
common stock outstanding as of March 9, 2000.
BENEFICIAL OWNERSHIP OF DIRECTORS
AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- ----------------------- ----------------
<S> <C> <C>
Charles W. Albo - Chairman and 1,044,431 (1) 17.3%
Executive Vice President
1600 Wilson Blvd.
Suite 1008
Arlington, VA 22209
Steven Albo 151,667 (2) 2.5%
Chief Technology Officer
1600 Wilson Blvd.
Suite 1008
Arlington, VA 22209
Raleigh Coffin - Director 100,000 (3) 1.6 (4)
c/o Hudson Capital Advisors, LLC
160 Shore Road
Old Greenwich, CT 06870
W. Todd Coffin - Chief 292,007 (4) 4.7%
Executive Officer, President and
Director
1600 Wilson Blvd.
Suite 1008
Arlington, VA 22209
Nana Maraneli - Vice 1,000,000 (5) 16.6%
Chairperson,
Executive Vice President and
Secretary
1600 Wilson Blvd.,
Suite 1008
Arlington, VA 22209
Richard D. Rose - Treasurer and 50,000 (6) -- (7)
Chief Financial Officer
1600 Wilson Blvd.,
Suite 1008
Arlington, VA 22209
</TABLE>
21
<PAGE> 24
<TABLE>
<S> <C> <C>
John Theodoracopulos Director 150,623 (8) 2.5%
545 Madison Avenue
6th Floor
New York, NY 10022
Ronald Frankum 12,500 (9) -- (7)
Director
774 Mays Blvd., Suite 10-222
Incline Village, NV 89451
Directors and Executive Officers as a Group 2,757,895 41.9%
</TABLE>
1. Includes 1,000,000 shares owned of record by Albo Limited Partners, a
Virginia limited partnership, of which Mr. Albo is general partner.
2. Represents warrants to purchase 75,000 shares of common stock at $1.00
per share granted as of January 1, 1999, all of which are vested,
warrants to purchase 25,000 shares of common stock at $1.00 per share
granted as of April 20, 1999, all of which are vested, and options to
purchase 33,334 shares of common stock at $1.50 per share, all of which
are vested.
3. Represents 100,000 warrants to purchase shares of common stock at an
exercise price of $1.00 per share which are fully vested.
4. Includes warrants to purchase 4,688 shares of common stock at an exercise
price of $2.00 per share, warrants to purchase 37,319 shares of common
stock at an exercise price of $1.35 per share, and warrants to purchase
200,000 shares of common stock at an exercise price of $3.00 per share,
all of which are vested and owned beneficially and of record by Hudson
Allen & Co. Mr. Coffin is an equity holder in Hudson Allen & Co.
5. Includes 950,000 shares owned of record by Maraneli Limited Partners, a
Virginia limited partnership, of which Ms. Maraneli is general partner.
6. Represents warrants to purchase 25,000 shares of common stock at an
exercise price of $1.00 per share which are vested, and options to
purchase 25,000 shares of common stock at $1.50 which are vested.
7. Percent of class is less than 1%.
8. Includes 138,123 shares of issued common stock and warrants to purchase
12,500 shares of common stock at an exercise price of $3.00 per share
which are fully vested.
9. Represents options granted under the Company's 1999 Directors Stock
Option Plan which are fully vested.
CONDITIONAL RIGHT TO ACQUIRE CERTAIN SECURITIES
In addition to the shares set forth in the table above, Charles Albo and
Nana Maraneli also each own warrants to purchase 125,000 shares of common stock
at $1.50 per share, which vest when the shares of common stock issued in the
unit placement are registered for resale or otherwise are exempt from
registration under the Securities Act and the stock price per share has closed
at or above $3.00 bid for 20 consecutive trading days within the eighteen month
period
22
<PAGE> 25
following the closing of such private placement. The warrants were issued on
April 20, 1999 and expire on April 20, 2004.
In addition to options to purchase 41,667 shares of common stock at a
price of $1.50 per share and warrants to purchase 110,000 shares of common stock
at a price of $1.00 per share, all of which are fully vested, Mr. Stephen Albo
owns options to purchase 58,333 shares of common stock at a price of $1.50 per
share and warrants to purchase an additional 40,000 shares of common stock at a
price of $1.00 per share, which vest in equal 10,000 warrant increments on each
six month anniversary of the date of issuance of the warrants. The warrants were
issued to Mr. Stephen Albo as of April 20, 1999.
In addition to the 292,007 shares of common stock shown in the table above, Mr.
W. Todd Coffin, through Coffin & Sons, Inc., his wholly-owned consulting
company, also has the right to receive (i) 50,000 additional shares of common
stock upon the completion of the next private placement to occur after April,
1999 in an amount in excess of $1,000,000 at a price per share of at least $1.50
per share, (ii) 50,000 shares of common stock following the closing of such
private placement, if the shares issued in such private placement are
successfully registered for resale under the Securities Act and the stock trades
at or above $3.00 per share for 20 consecutive trading days within 18 months of
the closing of such private placement, and (iii) in the event we and Coffin &
Sons, Inc. choose not to renew their consulting arrangement, 50,000 shares of
common stock following the installation of a new chief executive officer
identified and recruited by Coffin & Sons, Inc. and acceptable to us.
Also in addition to the 292,007 shares of common stock shown above, Mr. Coffin,
through Hudson Allen & Co., has been granted warrants to purchase an additional
300,000 shares of common stock which are not currently vested, but vest in
100,000 warrant increments for each $2,000,000 worth of financing obtained for
us by Hudson Allen. Mr. Todd Coffin is an equity owner of Hudson Allen & Co.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April, 1999, Mr. Albo, Chairman and Executive Vice President, and Ms.
Maraneli, Vice-Chairperson and Executive Vice President, each transferred
550,000 shares of common stock to us, for cancellation. The cancellation became
effective in May, 1999. In exchange for the cancellation of these shares, we
issued to each of Mr. Albo and Ms. Maraneli warrants dated April 20, 1999 to
purchase 125,000 shares of common stock at an exercise price of $1.50 per share.
Mr. Albo and Ms. Maraneli are our founders.
In April 1999, Mr. Albo and Ms. Maraneli also each transferred to us
75,000 shares, at a price of $1.50 per share, which shares were redeemed by the
Company effective May 1999. Mr. Albo and Ms. Maraneli have agreed that payment
of the $1.50 per share will be deferred until the closing of a private placement
of common stock in an amount not less than $1,000,000 or another equity
financing in which we receive proceeds of not less than $1,000,000. In exchange
for the deferral of our payment obligations, we have agreed to advance each of
Mr. Albo and Ms. Maraneli up to $7,000 each month as a loan to Mr. Albo and Ms.
Maraneli, not to exceed the $112,500 in the aggregate. All amounts so advanced
will be deducted from $112,500 to be paid
23
<PAGE> 26
to Mr. Albo and Ms. Maraneli upon the closing of the proposed private placement
or other equity financing providing proceeds to us of not less than $1,000,000.
Mr. Albo and Ms. Maraneli are required to repay such advances only from amounts
paid to Mr. Albo and Ms. Maraneli pursuant to the redemption of their shares
described above.
In April 1999, Mr. Albo agreed to convert our shareholder demand note in
the aggregate principal amount of $99,969 in favor of Mr. Albo into 44,431
shares of common stock, reflecting a conversion rate of $2.25 per share. The
demand note was cancelled in exchange for the issuance of the shares in May,
1999.
In May 1999, we sold $575,000 of our 10% Convertible Debentures. The
Debentures were automatically converted into common stock upon the first closing
of the Unit offering described below at an effective conversion price of $1.00
per share. Mr. Theodoracopulos, a director, purchased $25,000 aggregate
principal amount of such Debentures.
In October 1999, we entered into a letter agreement with the investment
banking firm of Hudson Allen & Co. Under the terms of the agreement, Hudson
Allen has agreed to render investment banking services for one year in exchange
for a signing fee of 500,000 common stock purchase warrants, 100,000 vesting
upon signing, with the remainder vesting in 100,000 warrant increments for each
$2,000,000 worth of financing obtained for us by Hudson Allen. Under the
agreement, Hudson Allen will also serve as our non-exclusive placement agent. As
our placement agent Hudson Allen will be entitled to commissions pursuant to
successful financings in the form of a cash fee of 8% of gross proceeds
received, 8% warrant coverage for proceeds up to $5,000,000 and a cash fee of 5%
and 5% warrant coverage for proceeds received in excess of $5,000,000. We expect
the warrants to provide for registration rights for the common stock underlying
the warrants.
Hudson Allen will be entitled to receive a management fee of $6,000 per
month from and after the date on which it has raised $1,000,000 for us as a
management and consulting fee. In the event of a merger or acquisition
consummated by a source introduced to us by Hudson Allen, a fee in the amount of
3% shall be payable to Hudson Allen. Hudson Allen will receive 1% of the
transaction value if we are acquired by another entity not introduced by Hudson
Allen and Hudson Allen works on such transaction at any time during the
effectiveness or within one year after termination of this agreement.
Hudson Allen will be entitled to the foregoing fees if:
1. a financing, merger or acquisition is consummated within 12 months
of their termination (or the expiration of Hudson Allen's
engagement); and
2. there was contact by or through Hudson Allen with the other party
to the financing, regarding financing during the period of the
engagement; or
3. any materials, presentations or analyses prepared by Hudson Allen
are provided to the other party prior to consummation of the
financing.
The agreement requires us to indemnify Hudson Allen under certain
circumstances and reimburse Hudson Allen for its expenses incurred in the course
of representing us. We can
24
<PAGE> 27
provide no assurance that Hudson Allen will be successful in raising funds for
us or in finding suitable acquisitions.
Mr. Coffin has been serving as chief executive officer on an interim
month-to-month basis since his contract expired on October 15, 1999. We are
actively engaged in locating a suitable replacement but have not made a hiring
decision. Mr. Coffin intends to step down as chief executive officer and
director during the fourth quarter of this year assuming that a suitable
replacement is located. We can provide no assurance, however, that we will be
able to locate a suitable replacement prior to Mr. Coffin's departure. In
addition, Mr. Coffin is associated with Hudson Allen & Co., our investment
banking firm. Mr. Coffin may receive a portion of the consideration Hudson Allen
becomes entitled to under our letter agreement with Hudson Allen. See "Security
Ownership of Certain Beneficial Owners and Management: Conditional Right to
Acquire Certain Securities" for additional information, which is incorporated by
reference herein and "Executive Compensation: Employment Agreements" for
additional information, which are incorporated by reference herein.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements
Included in Part II of this report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for each of the two years in the
period ended December 31, 1999
Consolidated Statement of Changes in Stockholders' Equity for each of the
two years in the period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the two years in the
period ended December 31, 1999
Notes to Consolidated Financial Statements for the years ended December
31, 1999 and 1998
Exhibits
The exhibits are set forth on the attached Exhibit Index which is incorporated
by reference.
Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
25
<PAGE> 28
EXHIBIT INDEX
Exhibit
No. DESCRIPTION OF EXHIBIT
2.1 Plan of Merger between Sonus Park Acquisition, Inc. and Sonus
Communications, Inc. dated February 26, 1999, contained in the
Agreement of Merger previously filed as Exhibit 3.1(f) to Form
10-SB filed May 14, 1999 (the "Form 10-SB"), hereby incorporated
by reference.
2.2 Agreement and Plan of Merger dated April 12, 1999, contained in
the Articles of Merger previously filed as Exhibit 3.1(g) to Form
10-SB, hereby incorporated by reference.
2.3 Merger Agreement dated as of November 15, 1999 among the Company,
Empire One Acquisition Corporation, Empire One
Telecommunications, Inc., John K. Friedman, Paul A. Butler, and
Bradley D. Lewis previously filed as Exhibit 2.3 to Form SB-2
filed December 7, 1999 ("Form SB-2"), hereby incorporated by
reference.
3.1 Certificate of Incorporation of the Company, previously filed as
Exhibit 2.1 of Form 10-SB, hereby incorporated by reference.
3.2 By-laws of the Company, previously filed as Exhibit 2.2 of Form
10-SB, hereby incorporated by reference.
4.1 Stock Subscription Agreement dated January 14, 1999, previously
filed as Exhibit 3.1(a) of Form 10-SB, hereby incorporated by
reference.
4.2 Placement Agent Agreement dated January 14, 1999, previously
filed as Exhibit 3.1(b) of Form 10-SB, hereby incorporated by
reference.
4.3 Shareholders Agreement dated as of January 21, 1999, previously
filed as Exhibit 3.1(c) of Form 10-SB, hereby incorporated by
reference.
4.4 10% Convertible Debentures dated May 5, 1999, previously filed as
Exhibit 3.1(d) of Form 10-SB, hereby incorporated by reference.
4.5 Debenture Purchase Agreement dated May 5, 1999, previously filed
as Exhibit 3.1(e) of Form 10-SB, incorporated herein by
reference.
4.6 Articles of Merger dated February 26, 1999, previously filed as
Exhibit 3.1(f) of Form 10-SB, hereby incorporated by reference.
4.7 Articles of Merger dated April 12, 1999, previously filed as
Exhibit 3.1(g) of Form 10-SB, hereby incorporated by reference.
26
<PAGE> 29
4.8 Certificate of Merger dated April 12, 1999, previously filed as
Exhibit 3.1(h) of Form 10-SB, hereby incorporated by reference.
4.9 78,750 Placement Agent Warrants issued to L. Flomenhaft & Co.,
Inc. dated January 21, 1999, previously filed as Exhibit 4.9 to
Form SB-2, incorporated herein by reference.
4.10 11,250 Warrants issued to Lawrence Kaplan dated January 21, 1999,
previously filed as Exhibit 4.10 to Form SB-2, incorporated
herein by reference.
4.11 487,500 Consulting Warrants issued to L. Flomenhaft & Co., Inc.
dated January 21, 1999, previously filed as Exhibit 4.11 to Form
SB-2, incorporated herein by reference.
4.12 86,250 Debenture Placement Agent Warrants issued to L. Flomenhaft
& Co., Inc. dated August 3, 1999, previously filed as Exhibit
4.12 to Form SB-2, incorporated herein by reference.
4.13 Form of Unit Warrant issued to various purchasers dated August 3,
1999, previously filed as Exhibit 4.13 to Form SB-2, incorporated
herein by reference.
4.14 32,812 Unit Placement Agent Warrants issued to L. Flomenhaft
dated August 3, 1999, previously filed as Exhibit 4.14 to Form
SB-2, incorporated herein by reference.
4.15 4,688 Unit Placement Agent Warrant issued to Tanner Unman
Securities, Inc. on August 3, 1999, previously filed as Exhibit
4.15 to Form SB-2, incorporated herein by reference.
4.16 4,444 Placement Agent Warrants issued to Coffin & Sons, Inc.
dated November 22, 1999, previously filed as Exhibit 4.16 to Form
SB-2, incorporated herein by reference.
4.17 58,276 Placement Agent Warrants issued to L. Flomenhaft & Co.,
Inc. dated November 22, 1999, previously filed as Exhibit 4.17 to
Form SB-2, incorporated herein by reference.
10.1 Employment Agreement dated as of April 15, 1999 between the
Company and Charles W. Albo, previously filed as Exhibit 10.1 to
Form SB-2, incorporated herein by reference.
10.2 Employment Agreement dated as of April 15, 1999 between the
Company and Nana Maraneli, previously filed as Exhibit 10.2 to
Form SB-2, incorporated herein by reference.
27
<PAGE> 30
10.3 Consulting Agreement between Sonus Communications, Inc. and L.
Flomenhaft & Co., Inc. dated January 14, 1999, previously filed
as Exhibit 6.1(a) of Form 10-SB, hereby incorporated by
reference.
10.4 Placement Agent Agreement between Sonus Communications, Inc. and
L. Flomenhaft & Co., Inc. dated January 14, 1999, previously
filed as Exhibit 3.1(b) of Form 10-SB, hereby incorporated by
reference.
10.5 Employment Agreement with Richard D. Rose dated April 15, 1999,
previously filed as Exhibit 6.1(c) of Form 10-SB, hereby
incorporated by reference.
10.6 Consulting Agreement with Raleigh Coffin dated as of April 15,
1999, previously filed as Exhibit 6.1(d) of Form 10-SB, hereby
incorporated by reference.
10.7 10% Convertible Debentures dated May 5, 1999, previously filed as
Exhibit 3.1(d) of Form 10-SB, hereby incorporated by reference.
10.8 Consulting Agreement dated April 15, 1999 between the Company and
Coffin & Sons, Inc., previously filed as Exhibit 6.1(f) of Form
10-SB, hereby incorporated by reference.
10.9 Hudson Allen Letter Agreement, previously filed as Exhibit 10.9
of Form SB-2, hereby incorporated by reference.
22 Subsidiaries of the Company: Sonus Communication, Inc., a
Virginia corporation, and Empire One Acquisition Corporation, a
Delaware corporation.
27 Financial Data Schedule
28
<PAGE> 31
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: March 27, 2000 SONUS COMMUNICATION HOLDINGS, INC.
BY:/s/ W. Todd Coffin
-------------------------------------
W. Todd Coffin
President and Chief Executive Officer
In accordance with the Act, 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>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ W. Todd Coffin President and Chief Executive March 27, 2000
- ---------------------------------- Officer and Director
W. Todd Coffin
/s/ R. D. Rose Chief Financial Officer March 27, 2000
- ---------------------------------- (Principal Financial and
Richard D. Rose Accounting Officer)
/s/ Charles W. Albo Director March 27, 2000
- ----------------------------------
Charles W. Albo
/s/ Nana Maraneli Director March 27, 2000
- ----------------------------------
Nana Maraneli
/s/ Raleigh Coffin Director March 27, 2000
- ----------------------------------
Raleigh Coffin
/s/ John Theodoracopulus Director March 27, 2000
- ----------------------------------
John Theodoracopulus
/s/ Ronald Frankum Director March 27, 2000
- ----------------------------------
Ronald Frankum
</TABLE>
29
<PAGE> 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report...................................................F-2
Financial Statements:
Consolidated Balance Sheets........................................F-3
Consolidated Statements of Operations..............................F-4
Statement of Changes in Stockholders' Equity.......................F-5
Consolidated Statements of Cash Flows..............................F-6
Notes to Financial Statements..................................................F-7
</TABLE>
F-1
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Sonus Communication Holdings, Inc.
Arlington, Virginia
We have audited the consolidated balance sheets of Sonus Communication Holdings,
Inc. and subsidiary as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 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
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sonus Communication Holdings, Inc. and
subsidiary as of December 31, 1999 and 1998 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
LAZAR LEVINE & FELIX LLP
New York, New York
February 10, 2000
F-2
<PAGE> 34
SONUS COMMUNICATION HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 234,688 $ 1,263
Accounts receivable, less allowance for doubtful
accounts of $20,223 in 1999 31,936 41,244
Installment sales receivable, net of unearned
profit of $106,134 in 1999 and $ 131,340 in 1998 187,430 231,090
Loan receivable 150,000 -
Prepaid expenses 166,572 -
----------- -----------
TOTAL CURRENT ASSETS 770,626 273,597
PROPERTY AND EQUIPMENT, net 721,905 231,615
OTHER ASSETS 62,062 -
----------- -----------
TOTAL ASSETS $ 1,554,593 $ 505,212
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 382,045 $ 212,039
Vendor equipment payable 364,666 356,273
Lease obligation, current portion 87,399
Due to shareholders 113,000 -
Accrued expenses 42,510 17,496
----------- -----------
TOTAL CURRENT LIABILITIES 989,620 585,808
----------- -----------
Due to shareholder - 99,969
Lease obligation, net of current portion 109,550 -
Other noncurrent liabilities 43,000 -
----------- -----------
TOTAL LIABILITIES 1,142,170 685,777
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; authorized 100,000,000 shares; issued
and outstanding 4,598,850 shares in 1999
and 3,597,954 shares in 1998 460 360
Additional paid-in capital 2,476,488 267,334
Subscriptions received 135,000 -
Accumulated deficit (2,199,525) (448,259)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 412,423 (180,565)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,554,593 $ 505,212
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 35
SONUS COMMUNICATION HOLDINGS INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING INCOME:
Telecommunication services $ 1,635,042 $ 225,840
Consulting services - 61,450
Installment sales 69,014 -
----------- -----------
Total 1,704,056 287,290
OPERATING EXPENSES
Direct expenses 1,951,519 267,946
General & administrative 1,237,092 93,752
----------- -----------
3,188,611 361,698
LOSS FROM OPERATIONS (1,484,555) (74,408)
OTHER EXPENSE
Interest, net (5,100) (6,998)
Merger related costs (261,611) -
----------- -----------
(266,711) (6,998)
LOSS BEFORE INCOME TAXES (1,751,266) (81,406)
Provision for income taxes - -
----------- -----------
NET LOSS $(1,751,266) $ (81,406)
=========== ===========
Basic loss per common share $ (0.44) $ (0.02)
=========== ===========
Shares used in per share calculation 3,965,071 3,488,298
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 36
SONUS COMMUNICATION HOLDINGS, INC. AND SUBSIDIARY
STATEMENT CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-------------------------- Paid-in Subscription Accumulated
Shares Amount Capital Received Deficit Total
---------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 3,378,512 $ 338 $ 238,211 $ - $ (366,853) $ (128,304)
Split shares issued for rounding 129 - - - - -
Conversion of loans 162,877 16 21,629 - - 21,645
Sale of common shares 56,436 6 7,494 - - 7,500
Net loss - - - - (81,406) (81,406)
---------- ----------- ----------- --------- ----------- -----------
Balance, December 31, 1998 3,597,954 $ 360 $ 267,334 $ - $ (448,259) $ (180,565)
Sale of common shares 750,000 75 626,559 626,634
Shares issued for merger related
consulting fees 150,000 15 89,985 90,000
Shares returned by founders (1,100,000) (110) 110 -
Shares issued to consultant 50,000 5 37,495 37,500
Conversion on shareholder note 44,431 4 99,965 99,969
Repurchase from shareholders (150,000) (15) (224,985) (225,000)
Sale of common shares in Unit
equity offering 250,000 25 434,914 434,939
Conversion of convertible
debentures 588,325 59 530,766 530,825
Sale of common shares 418,140 42 502,345 502,387
Waiver of compensation payable 112,000 112,000
Received for January 2000
financing 135,000 135,000
Net loss - - - - (1,751,266) (1,751,266)
---------- ----------- ----------- --------- ----------- -----------
Balance, December 31, 1999 4,598,850 $ 460 $ 2,476,488 $ 135,000 $(2,199,525) $ 412,423
========== =========== =========== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 37
SONUS COMMUNICATION HOLDINGS, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,751,266) $ (81,406)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 98.529 25,735
Common shares issued for services rendered 127,500 -
Time contributed in lieu of salary 112,000 -
Changes in assets and liabilities:
Accounts receivable 9,308 (41,244)
Installment sales receivable 43,660 (231,090)
Prepaid expenses (166,572) 2,018
Accounts payable 170,006 209,890
Vendor equipment payable 8,393 356,273
Accrued expenses 25,014 5,316
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,323,428) 245,492
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (379,417) (257,350)
Loan to Empire One Telecomm (150,000) -
Deposits for equipment and circuits (19,062) -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (548,479) (257,350)
CASH FLOWS FROM FINANCING ACTIVITIES:
Private placement of common shares, net 2,094,785 7,500
Subscriptions received 135,000 -
Repurchase of founder shares (112,000) -
Payment of lease obligation for network equipment (12,453) -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,105,332 7,500
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 233,425 (4358)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR $ 1,263 $ 5,621
---------- ----------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 234,688 $ 1,263
========== ==========
SUPPLEMENTAL INFORMATION
Cash payments for interest $ 13,289 $ -
========== ==========
Cash payments for taxes $ - $ -
========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 38
SONUS COMMUNICATION HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts
of Sonus Communication Holdings, Inc. (the "Company" or "Holdings") and
Sonus Communications, Inc. ("Sonus"), the Company's wholly owned
subsidiary. The Company was incorporated in April 1999 as part of the
merger between Sonus Communications Inc and The Park Group ("Park") and
re-incorporation of The Park Group in Delaware (see Note 3 for details).
Holdings is an inactive company whose only asset currently is Sonus.
Sonus is a provider of low-cost, high-quality international telephone and
Internet services. Sonus secures access to international destinations
that offer the opportunity for large call volumes and high margins. The
company establishes Internet connectivity and uses the circuit to provide
voice, facsimile, Internet, and e-commerce services to US and foreign
telephone and Internet Service Providers. In general, Sonus' destinations
are in developing countries characterized by high international telephone
rates, poor Internet connectivity and little access to U.S. e-commerce or
business-to-business services.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary Sonus Communications, Inc. All
significant intercompany balances and transactions have been eliminated
in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results may differ from those estimates.
REVENUE RECOGNITION
Revenue from telecommunications services is recognized as the service is
provided. In connection with the sale of equipment, the related
receivable is collected over extended periods based on usage of the
equipment and consequently the revenue and profit is recognized on the
installment method as the receivable is collected (see Note 4 for
details).
F-7
<PAGE> 39
DIRECT OPERATING EXPENSES
Direct operating expenses consist primarily of telecommunications costs,
connectivity costs and the cost of equipment sold to customers.
PROPERTY AND EQUIPMENT
Network equipment and furniture and fixtures are recorded at cost and
depreciated using the following estimated useful lives:
Computers and other 2 - 7 years
Network equipment 5 years
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash and cash
equivalents are carried at cost which approximates market value.
The Company maintains its cash balances primarily in one financial
institution. These balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. Management periodically monitors the credit
worthiness of its bank to lower its risk.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach as per FASB Statement no. 109, Accounting for Income Taxes
("FASB 109"). Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and
tax bases of assets and liabilities using expected tax rates in effect
for the year in which the differences are expected to reverse. Under FASB
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment date of the
rate change.
STOCK BASED COMPENSATION
FASB Statement No. 123 Accounting for Stock Based Compensation, requires
the Company to either record compensation expense or to provide
additional disclosures with respect to stock awards and stock option
grants. Such disclosure is included in Note 8 below. No compensation
expense is recognized pursuant to the Company's stock option plan under
FASB 123, which is consistent with prior treatment under APB 25.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated in accordance with FASB Statement
No. 128, Earnings per Share. Basic earnings (loss) per share is computed
by dividing the net income (loss) applicable to common shares by the
weighted average number of common
F-8
<PAGE> 40
shares outstanding during the period. Diluted earnings (loss) per share
adjusts basic earnings (loss) per share for the effects of convertible
securities, stock options and other potentially dilutive financial
instruments, only in the periods in which such effect is dilutive.
CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, trade receivables and property. Concentration of credit risk
with respect to trade receivables is limited as a result of the customer
base being mostly in the United States and the property risk limited
because most equipment in foreign countries is owned by the Company's
vendor in that country.
STATEMENT OF COMPREHENSIVE INCOME
SFAS 130, Reporting Comprehensive Income prescribes standards for
reporting comprehensive income and its components. Since the Company
currently does not have any items of other comprehensive income, a
statement of comprehensive income is not required.
NOTE 3 - MERGER & ACQUISITION
MERGER: In January 1999, Sonus entered into merger discussions with Park.
In anticipation of the merger, Park formed Sonus Park Acquisition, Inc.
as a wholly owned subsidiary of Park. On March 4, 1999, Park Acquisition
merged with and into Sonus leaving Sonus as the surviving corporation and
a wholly owned subsidiary of Park. The former shareholders of Sonus
received 92% of the capital stock of Park. The merger was accomplished
via a reverse acquisition accounted for as a pooling of interests.
On April 7, 1999, Park organized Sonus Communication Holdings, Inc. as a
Delaware corporation and wholly owned subsidiary of Park. On April 16,
1999, Holdings merged with and into Park leaving Holdings as the
surviving corporation. As a consequence of the merger, Sonus became a
wholly owned subsidiary of Holdings. Shares of Park were exchanged for
shares of Holdings on a one-for-one basis in the merger. The sole purpose
of the merger was to re-incorporate in the state of Delaware.
SUBSEQUENT ACQUISITION: On November 15, 1999, the Company signed a
definitive merger agreement, subject to regulatory and EOT shareholder
approval, to acquire Empire One Telecommunications, Inc. ("EOT") for
1,065,857 shares of common stock of the Company in exchange for all the
outstanding common shares of EOT plus assumption of debt. The shares were
valued at $3.00 per share. The Company has received Federal Communication
Commission and New York State Public Service Commission approval with the
remaining regulatory approvals anticipated before the end of the first
quarter of 2000. EOT has scheduled the shareholder meeting on March 6,
2000 to vote on the merger.
F-9
<PAGE> 41
EOT is a domestic Competitive Local exchange Carrier ("CLEC"),
Interexchange Carrier and Internet Service Provider that offers a full
range of services including local, long-distance, internet access and web
hosting services to approximately 12,000 subscribers. EOT's 1999 revenues
were approximately $4.9 million.
NOTE 4 - INSTALLMENT SALES
During 1998, the Company purchased telecommunications equipment from a
vendor at a cost of $231,090 which was sold to Egrisi Joint Stock
Company, Ltd., an entity in the Republic of Georgia for $362,430. The
payment terms are based on the usage of the equipment and consequently
the collection period may be extended. As a result, the Company has
recorded this sale under the installment method. Each payment collected
is allocated to cost and profit in the same ratio that these two elements
existed at the time of the sale. No installment sales were recorded in
1998. During 1999, the Company recorded installment sales of $69,014 with
a margin of $ 25,206. At December 31, 1999, the remaining receivable on
the installment sale was $187,430 net of unearned profit of $106,134.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Network equipment $ 619,754 $ 257,350
Computers & other office equipment 17,013 -
Assets held under capital lease 209,402 -
--------- ---------
846,169 257,350
Accumulated depreciation (124,264) (25,735)
--------- ---------
Property and equipment, net $ 721,905 $ 231,615
========= =========
</TABLE>
NOTE 6 - STOCKHOLDERS EQUITY
On January 20, 1999, in connection with the merger with Park (see Note
3), the shareholders of the Company approved a 1 for 262.154216 reverse
stock split of the Company's common stock. Additional shares were issued
to round up each shareholder's fractional shares, and as a result of this
split, 347,954 shares became outstanding immediately after the reverse
split. The financial statements have been retroactively adjusted to
account for this transaction.
NOTE 7 - FINANCING
On January 21, 1999, Sonus completed the sale of 750,000 shares of common
stock at $1.00 per share in a private placement to accredited investors.
The aggregate offering price was $750,000 with Sonus netting cash
proceeds of $627,000. L. Flomenhaft & Co.("Flomenhaft"), acting as
investment banker, received $75,000 in cash and a five year
F-10
<PAGE> 42
common stock purchase warrant for 112,500 shares for its services. The
investors in the private placement received piggyback registration rights
in connection with the sale.
In May 1999, the Company issued an aggregate principal amount of $575,000
of its 10% convertible debentures ("Debentures"). The Debentures were
automatically converted under the terms of the agreement to common stock
with the sale of the Equity Unit offering in August 1999 as described
below. Debenture holders were also entitled to an "equity kicker" equal
to one-half the number of shares of common stock into which the
Debentures were converted. The Company converted the Debentures into
common stock at $1.50 per share and, in accordance with the terms of the
Debentures, provided the additional shares as part of the equity kicker
thereby effectively making the price of the common shares $1.00 per
share. Flomenhaft provided the investment banking services for this
offering. By the terms of the Debentures, all investment banking fees
were deferred until the Debentures were converted. In August, with the
conversion of the Debentures into shares of common stock, the cash fees
of $57,500 and the five-year warrants were issued to Flomenhaft.
In August 1999, the Company sold $500,000 of its equity Units, consisting
of an aggregate of 250,000 shares of common stock and 250,000 common
stock purchase warrants. Each warrant is exercisable at $3.00 per share
of common stock. The sale resulted in net proceeds to the Company of
$435,000 after investment banking fees and other expenses. The investment
banking fees resulted in a cash payment to Flomenhaft of $50,000 and the
issuance to Flomenhaft and a nominee of Flomenhaft five-year common stock
purchase warrants.
In conjunction with the acquisition of Empire One Telecommunications, the
Company completed the sale of 1,851,504 shares of common stock at $1.35
per share. The aggregate offering price was $2.5 million with the Company
realizing $2,246,000 in cash proceeds. The offering was completed in
three pieces with the first closing occurring on November 22, 1999 for
418,140 shares resulting in gross proceeds of $564,000 and net proceeds
to the Company of $502,000, the second closing occurring on January 5,
2000 for 1,088,939 shares resulting in gross proceeds of $1,470,000 and
net proceeds to the Company of $1,327,000, and the final closing
occurring on January 27, 2000 for 344,425 shares resulting in gross
proceeds of $465,000 and net proceeds to the Company of $417,157. The
difference between gross proceeds and net proceeds reflect expenses of
approximately $11,000 with the remaining difference being the cash
portion of the investment banking fees. The closing that occurred on
November 22, 1999 is included in the issued and outstanding common stock
of the Company at December 31, 1999. At December 31, 1999, the Company
had received $135,000 from investors in anticipation of the closing that
occurred on January 5, 2000. These proceeds are shown in the equity
section on the accompanying Consolidated Balance Sheet as subscriptions
received.
In the third quarter of 1999, the Company entered into an equipment
leasing arrangement with its network equipment supplier. The agreement
provides for a total available facility of $2.2 million. Under the
arrangement, the Company leased $209,000 of network equipment in the
third quarter recording the transaction as a capital lease. Subsequent to
F-11
<PAGE> 43
December 31, 1999, the Company converted the outstanding vendor equipment
payable of $365,000 into a lease under this leasing agreement. If the
lease had been converted at December 31, 1999, $219,000 of the vendor
equipment payable would have been classified as a long-term obligation.
NOTE 8 - WARRANTS AND OPTIONS
FINANCING WARRANTS: In conjunction with the financing completed on
January 21, 1999 See Note 7 for a discussion of financing activity),
Flomenhaft received 112,500 stock purchase warrants as a portion of the
fees for acting as Sonus' investment banker. The exercise price was set
at $1.00 per share, the per share sales price of the related private
placement. Of the 112,500 warrants, Sonus issued 90,000 warrants to
Flomenhaft and a warrant for the remaining 22,500 shares to a nominee of
Flomenhaft. The warrants have piggyback registration rights associated
with them.
In May 1999, Flomenhaft acted as investment banker for the Company's 10%
Convertible Debentures. As part of the fees for managing this offering,
Flomenhaft earned common stock purchase warrants to acquire shares of the
Company equal to 15% of the shares into which the Debentures converted at
the effective conversion price of the Debentures. Under the terms of the
Debenture Agreement, the Company had the right to either pay off the
Debentures or to convert the Debentures to common shares, therefore the
number of warrants and the exercise price of such warrants could only be
determined upon conversion. Consequently, by agreement, the issuance to
Flomenhaft of the warrants associated with the Debentures was deferred
until the actual date of conversion. The Company chose to convert the
entire Debenture to common shares and therefore Flomenhaft received the
maximum number of warrants when the Debentures converted in August 1999.
The exercise price was equal to the effective offering price of $1.00 per
share.
As part of the investment banking fees in conjunction with the Company's
Unit Equity offering in August 1999, Flomenhaft earned a common stock
purchase warrant for 37,500 shares at an exercise price of $2.00 per
share, the price of each Unit in the offering. Of the shares earned,
32,812 were issued to Flomenhaft with the remaining 4,688 issued to a
nominee of Flomenhaft.
In conjunction with the financing traunch closed in November 1999,
Flomenhaft and a nominee of Flomenhaft received five-year common stock
purchase warrants to acquire a total of 62,720 shares of the Company's
common stock at an exercise price of $1.35 per share, the price paid by
investors for each share in the offering. As indicated above, the Company
closed the remaining portion of this offering in January 2000. Flomenhaft
and Hudson Allen (both investment bankers of the Company) received as the
non-cash portion of the investment banking fee for the two January 2000
closings, common stock purchase warrants to acquire respectively, 162,162
and 32,875, shares of the Company's common stock at an exercise price of
$1.35.
F-12
<PAGE> 44
CONSULTING WARRANTS: On January 14, 1999, Sonus Communications entered
into a two year consulting arrangement with L. Flomenhaft & Co.
("Consultant") whereby the Consultant is to provide strategic financial,
business planning and business development services. The Agreement became
effective January 21, 1999 when the first private placement was
completed. To compensate Consultant for his efforts, Sonus issued a
five-year warrant for 487,500 shares of common stock of the Company with
an exercise price of $1.00 per share.
Effective April 1, 1999, the Company entered into a consulting agreement
with Coffin & Sons, Inc., a consulting firm owned by Mr. W. Todd Coffin,
the Company's President and CEO. The agreement provided that Mr. Coffin
serve as CEO for a term of six months and 15 days and that Mr. Coffin
serve on the Board of Directors of the Company during the consulting
period. For the services of Mr. Coffin, Coffin & Sons received cash
compensation of $10,000 per month of which $2,000 per month was deferred
until after the successful completion of the next private placement
completed after the effective date of the agreement. The private
placement was completed and the deferred payment was subsequently paid.
In addition to the cash compensation, Coffin & Sons, Inc was issued
50,000 shares of common stock in May 1999 and is entitled to receive (i)
50,000 shares upon the successful completion of the private placement of
common shares at a per share price of at least $1.50 and gross proceeds
of at least $1 million; (ii) 50,000 shares following the registration of
shares issued in the private placement and the shares trade at or above
$3.00 per share for 20 consecutive trading days; and (iii) 50,000 shares
following the installation of a new chief executive officer identified by
Coffin & Sons, Inc and acceptable to the Company. The agreement expired
October 15, 1999. Mr. Coffin and the Company agreed to extend the
Agreement on a month-to-month basis until a new CEO can be found.
On April 20, 1999 the Company entered into a three-month consulting
agreement with Hudson Capital, a consulting firm owned by Mr. Raleigh
Coffin, a director of the Company and the father of Mr. W. Todd Coffin.
The agreement provided for Mr. R. Coffin to help the Company develop a
comprehensive business plan along with an institutional investor
presentation. Compensation to Hudson Capital consisted of $10,000 per
month of which $5,000 per month was deferred until after the successful
completion of the next private placement and a five-year warrant for
100,000 shares with an exercise price of $1.00 per share. The remaining
balance of $10,000 remaining at December 31, 1999 was paid in January
2000. The warrant vests as to: (i) 25,000 shares upon the signing of the
agreement; (ii) 25,000 shares upon the completion of the business plan;
(iii) 25,000 shares upon successful completion of the private placement
noted above and (iv) 25,000 shares when the stock publicly trades at
$3.00 per share for at least 20 consecutive days.
OTHER WARRANTS: In April 1999, Mr. Charles Albo, Chairman, and Ms.
Maraneli, Executive Vice President each transferred 550,000 shares of
common stock to the Company for cancellation by the Company. In exchange
for the shares, the Company issued Mr. Albo and Ms Maraneli each a five
year warrant to purchase 125,000 shares of
F-13
<PAGE> 45
the Company's common stock at an exercise price of $1.50 per share. Mr.
Albo and Ms. Maraneli are the original founders of Sonus Communications,
Inc.
Additionally, the Company in May 1999 redeemed from each of Mr. Albo and
Ms Maraneli 75,000 shares at $1.50 per share (the "Redemption Price").
Mr. Albo and Ms. Maraneli agreed that payment of the Redemption Price be
deferred until the closing of a private placement resulting in gross
proceeds to the Company of at least $1 million. In exchange for the
deferral of the Company's payment obligations, the Company agreed to
advance each of Mr. Albo and Ms. Maraneli up to $7,000 per month not to
exceed the total Redemption Price. All amounts advanced will be deducted
from the redemption price when paid. Although the repayment was required
to be made at the time of the Unit Equity sale in August, Mr. Albo and Ms
Maraneli have continued to accept advances from the Company in lieu of
full payment until the Company's cash position is better able to support
the remaining amounts due. As of December 31, 1999, $112,000 had been
paid leaving a balance due for the redemption of $113,000.
Pursuant to employment contracts, the Company has issued warrants to Mr.
Stephen Albo, the Company's Chief Technical Officer and to Mr. Richard
Rose, the Company's Chief Financial Officer. Initially, Mr. Albo received
in lieu of a salary, a five-year warrant to acquire 75,000 shares of
common stock that was fully vested at the time of issuance. At the time
Mr. Albo became a full time employee, a second five year warrant to
purchase 75,000 shares of common stock of the Company was issued which
vests over three years. Mr. Rose received upon execution of an employment
agreement, a five-year warrant to purchase 75,000 shares of common stock
of the Company which vests over three years. All of the above employment
warrants were issued with an exercise price of $1.00 per share, the price
at which the last shares of common stock had been sold prior to the
issuance of the warrants.
In conjunction with the hiring of an investment relations firm, the
Company issued a five year warrant to purchase 150,000 shares of common
stock of the Company at $2.50 per share, the market value on the date of
the agreement as determined based on the closing price of the Company's
common stock on the NASDAQ Bulletin board on the day prior to the date of
the agreement.
EMPLOYEE STOCK OPTION PLAN: On June 10, 1999, the Company adopted the
1999 Stock Incentive Plan (the "1999 Plan") which was approved by a
majority of the stockholders on July 12, 1999. Under the terms of the
1999 Plan, which expires on June 10, 2009, employees of the Company and
its subsidiaries may be granted incentive stock options, non-statutory
stock options and restricted stock awards. The option price of shares of
common stock generally will not be less than 100% of the fair market
value on the date of grant or 110% of fair market value in the case of a
grant to a 10% shareholder. No option will be exercisable more than ten
years from the date of grant. The Company has reserved 500,000 shares for
issuance under the 1999 Plan. At December 31, 1999, employees had been
granted 306,000 shares at prices ranging from $1.00 to $1.50, the fair
market value on the date of grant based on the most recent private
placement of the Company's common stock prior to the date of issuance of
the options.
F-14
<PAGE> 46
Options typically vest quarterly over a three-year period unless the
Board of Directors in its discretion provides otherwise. Options issued
during 1999 were issued with provisions for the option to vest quarterly
over three years from the date of grant. Options shall become fully
vested upon a "change of control" as defined in the 1999 Plan.
DIRECTORS OPTION PLAN: On June 10, 1999, the Company adopted the 1999
Director Stock Incentive Plan (the "Director Plan") which was approved by
a majority of the stockholders on July 12, 1999. Under the terms of the
Director Plan, which expires on June 10, 2009, non-employee directors of
the Company may be granted non-statutory stock options at an exercise
price equal to 100% of the fair market value on the date of grant. No
option will be exercisable more than ten years from the date of grant.
The Company has reserved 350,000 shares for issuance under the 1999 Plan.
At September 30, 1999, the Company had granted to a new director an
option for 50,000 shares at an exercise price of $2.00 per share, the
fair market value on the date of grant, under the Director Plan.
A summary of stock option transactions from the beginning of the plans
through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Employees' Plan Directors' Plan
--------------------- --------------------
Number Average Number Average
of Price Per of Price Per
Shares Share Shares Share
------- -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding January 1, 1999 - $ - $ -
Granted 306,000 $ 1.42 50,000 2.00
Exercised - - - -
Canceled - - - -
------- -------- ------ --------
Outstanding December 31, 1999 306,000 $ 1.42 50,000 $ 2.00
======= ======== ====== ========
Exercisable Options at December 31, 1999 64,417 $ 1.40 4,167 $ 2.00
======= ======== ====== ========
</TABLE>
The Company accounts for stock options under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these
options been determined consistent with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (FASB 123),
the net loss would have increased to $1,828,640 ($0.46 per share)
compared to $1,751,266 ($0.44 per share) as reported for the year ended
December 31, 1999. There would have been no impact in 1998 since the
plans were not established until June 1999.
For purposes of calculating the above required disclosure, the fair value
of each option is estimated on the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions used
for grants in 1999: risk-free interest rate of 6.84%, no expected
dividend yield, a volatility factor of the expected market price of the
Company's common stock of 75% and a expected life of seven years.
F-15
<PAGE> 47
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 assumptions including the expected stock price
volatility. Because the Company's employee and director stock options
have characteristics significantly different form 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 stock options.
The weighted average fair value of options granted during the year ended
December 31, 1999 was $1.77 with the actual exercise prices for options
outstanding as of December 31, 1999 ranging from $1.00 to $2.00 per
share.
NOTE 9 - INCOME TAXES
No provision for federal and state incomes has been recorded since the
Company has incurred losses through December 31, 1999 aggregating
$2,208,000. The use of the losses of the Company will be limited in the
future as a result of the merger with Sonus Communications which resulted
in a change of control under the rules of the Internal Revenue Service.
The losses of Sonus Communications expire beginning in 2013. Deferred tax
assets at December 31, 1999 and 1998 which consist primarily of the tax
effect of the net operating loss carryforwards noted above, amount to
approximately $750,000 and $60,000, respectively. The Company has
provided a valuation reserve to reduce this asset to zero at both
December 31, 1999 and 1998 since there is no assurance the Company will
generate future taxable income to utilize the asset.
NOTE 10 - GEOGRAPHIC AREA
The Company derives most of its telecommunications revenue from customers
located in the United States. Revenues from customers located outside the
United States are less than 10% of revenues. Revenues are derived by
selling communications services to points of presence located in the
following geographic areas:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---- ----
<S> <C> <C>
United States 4% - %
Europe 61% 100 %
Asia 35% - %
</TABLE>
NOTE 11 - TRANSACTIONS WITH THE FOUNDERS
At December 31, 1998, the Company had a note to a shareholder with a
principal balance of $99,969 plus accrued interest. Interest accrued at
an annual rate of 7%. In conjunction with an agreement made with the
shareholder effective April 16, 1999, the principal was converted into
44,431 shares of common stock of the Company. Accrued interest, which
F-16
<PAGE> 48
totaled $19,509 at the time of the principal conversion, remains unpaid
at December 31, 1999 and is included in other accrued expenses.
In May 1999, in conjunction with the agreement noted above, the Company
agreed to redeem from each of Mr. Albo and Ms Maranelli (the "Founders")
75,000 shares of common stock at $1.50 per share (the Redemption Price").
The Founders agreed that payment of the Redemption Price would be
deferred until the closing of a private placement resulting in gross
proceeds to the Company of at least $1 million. In exchange for the
deferral of the Company's payment obligations, the Company agreed to
advance each of the Founders $7,000 per month not to exceed the total
Redemption Price. All amounts advanced would be deducted from the
Redemption Price when paid. Although the repayment was required to be
made at the time of the Unit Equity sale in August 1999, the Founders
have continued to accept advances from the Company in lieu of full
payment until the Company's cash position is better able to support the
remaining amounts due. At December 31, 1999, $112,000 had been paid
leaving a balance due for the redemption of $113,000.
The Agreement further called for the Founders beginning on May 1, 1999 to
devote all their time to the Company and to take no compensation for one
year. Beginning May 1, 2000, the Founders will be paid an annual salary
commensurate with that paid to similarly situated members of senior
management of the Company. As a result of this agreement, the Company has
recorded $112,000 in 1999 as salary expense with a corresponding
contribution to capital for the fair value of the time devoted by the
Founders to the Company.
NOTE 12 - RELATED PARTY TRANSACTION
During 1998, the Company provided consulting services to Goodwill
Communications USA, Inc. ("Goodwill"), a corporation 90% owned by the
Company's two founders. Income earned for such services aggregated
$37,450. No such services were provided in 1999. As of December 31, 1998,
amounts payable to Goodwill amounted to $100,461 which were paid in 1999.
NOTE 13 - RETIREMENT PLAN
The Company's Retirement Plan (the "Plan"), which was establish in 1999,
is a defined contribution plan including provisions of section 401(k) of
the Internal Revenue Code. Employees of Holdings who have completed 30
days of service ("Participants") are eligible to participate in the Plan.
The Plan permits, but does not require, the Company to match employee
contributions. In addition, Holdings may make discretionary contributions
to the Plan which will be allocated to each participant based on the
ration of such Participant's eligible compensation to the total of all
Participants' eligible compensation. Amounts contributed by Holdings vest
evenly over three years based on years of service. Participants may elect
to direct the investment of their contributions in accordance with the
provisions of the Plan. The Company made no contributions to the Plan
during 1999.
F-17
<PAGE> 49
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leased facilities: The Company leases office space, certain equipment and
co-location space under lease agreements certain of which are renewable
at the Company's option and/or provide for increase in rent over the life
of the lease. Rent expense for 1999 was $44,749. During 1998, the Company
operated from an office located in the house of one of the founders at no
charge to the Company. The value of such space is not considered material
and therefore no rent expense has been recorded for such space.
Approximate aggregate future minimum rentals applicable to operating
leases in effect at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000 $ 68,427
2001 74,098
2002 12,903
2003 0
2004 0
After 2004 0
-------------
Total minimum rental $155,428
=============
</TABLE>
Other Contingencies:
A/ The Company is dependent on certain primary providers of
leased-line network capacity and internet access and upon
third-parties to provide telecommunications services it
provides to its customers.
B/ In 1998, the Company had one customer to which it provided
telecommunications services. In 1999, the Company had two
customers that provided approximately 71% of the Company's
revenue.
C/ The Company is a long-distance telecommunications
facilities-based carrier licensed by the Federal
Communications Commissions under Section 214 of the
Communications Act of 1934 and consequently is subject to
regulation by the FCC.
Employment contracts:
The Company entered into a one year employment contract with each of Mr.
Steven Albo, CTO, and Mr. Richard Rose, CFO, whereby each was given
warrants as described more fully in Footnote no. 8 above with each
receiving a salary of $84,000 per year and a payment at December 31, 1999
of an additional $31,000 providing each was employed by the Company at
that time. The contracts are renewable upon the mutual consent of The
Company and each of Mr. Albo and Mr. Rose. The employment agreements also
contain provisions pursuant to which they have agreed not to compete with
the Company.
F-18
<PAGE> 50
The Company entered into three-year employment agreements with Charles W.
Albo and Nana Maraneli as of April 15, 1999. The agreements provide that
Mr. Albo will serve as Executive Vice President and Chairman of Sonus
Communication Holdings, Inc. and Ms. Maraneli will serve as Executive
Vice President and Vice Chairman. Each has agreed to forgo any salary
during the first year of the term (through May 1, 2000) but will become
entitled to receive salary thereafter equivalent to that of similarly
situated executives, to be not less than $84,000 per year. The agreement
also provides that both shall be entitled to participate in benefit
programs available to similarly situated senior management employees from
and after April 15, 2000. The Company may terminate the employment
agreements for cause or upon a finding of disability under the
agreements. The employment agreements also contain provisions pursuant to
which both have agreed not to compete with the Company.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (A) the
consolidated financial statements and is qualified in its entirety by reference
to such (B) statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 234,688
<SECURITIES> 0
<RECEIVABLES> 52,159
<ALLOWANCES> (20,223)
<INVENTORY> 0
<CURRENT-ASSETS> 770,626
<PP&E> 846,169
<DEPRECIATION> (124,264)
<TOTAL-ASSETS> 1,554,593
<CURRENT-LIABILITIES> 989,620
<BONDS> 109,550
0
0
<COMMON> 460
<OTHER-SE> 411,963
<TOTAL-LIABILITY-AND-EQUITY> 1,554,593
<SALES> 0
<TOTAL-REVENUES> 1,704,056
<CGS> 0
<TOTAL-COSTS> 1,951,519
<OTHER-EXPENSES> 1,440,438
<LOSS-PROVISION> 58,265
<INTEREST-EXPENSE> 5,100
<INCOME-PRETAX> (1,751,266)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,751,266)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,751,266)
<EPS-BASIC> (0.44)
<EPS-DILUTED> 0
</TABLE>
