U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2000
Commission file number 0-14978
Pre-Cell Solutions, Inc.
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(Name of Registrant in its Charter)
Colorado 84-0751916
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
385 East Drive, Melbourne, Florida 32904
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(Address of Principal Executive Offices) (Zip Code)
(321) 308-2900
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
None.
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of August 10, 2000, the registrant had 39,851,859 shares of common
stock, $.01 par value per share, outstanding and, at such date, the aggregate
market value of the shares of common stock held by non-affiliates of the
registrant was approximately $42,672,327.50.
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits listed in Part IV of this Form 10-K are incorporated
by reference from prior filings made by the registrant under the Securities Act
of 1933, as amended.
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INDEX
TO FORM 10-K
Page
Number
PART I
Item 1. Business........................................................ 2
Item 2. Properties...................................................... 17
Item 3. Legal Proceedings............................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............. 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 18
Item 6. Selected Financial Data......................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 23
Item 8. Financial Statements and Supplementary Data..................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 23
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 23
Item 11. Executive Compensation.......................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 27
Item 13. Certain Relationships and Related Transactions.................. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 29
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PART I
Item 1. Business
Introduction
We are a prepaid telecommunications products and services provider,
offering wireless and competitive local exchange services. Prepaid
telecommunications service allows consumers to acquire access without credit
checks or the traditional contracts required for post-paid services and
eliminates credit risks to the provider. Additionally, prepaid services allow
consumers to control their telecommunications costs by ensuring that their
actual costs do not exceed their budgeted costs for a defined period. Once a
consumer begins using prepaid telecommunications services, the consumer's
account is verified and debited in real time. For prepaid dialtone service each
time a call is made the system checks to ensure that the account contains
available credit. Once the account status is verified, the services are provided
and the account is simultaneously debited. When the account has been depleted,
the service offering is terminated and further service is denied service until
the account is replenished.
We offer two main products, prepaid wireless and prepaid local exchange
services. Our prepaid wireless division is divided into two lines of business,
technology and distribution. We own proprietary software based technology that
is installed into a wireless handset. That technology allows a consumer to load
units of prepaid airtime into a cellular phone directly from the handset. By
communicating directly from the handset the customer transmits an identification
code and PIN number to the Company's central data base management system which
recognizes the handset, the airtime purchase code and immediately transmits the
settings that loads the purchased airtime units into the handset. This
technology maintains the inventory of unused airtime units in each of the
handsets thus eliminating a central database requiring continued updating of
usage and time availability. We license that technology to airtime carriers and
resellers that desire to provide prepaid wireless to their customers. We also
acquire wireless airtime from facilities based carriers and resell that airtime
through distributors and resellers. Our EZ Prepaid division sells wireless
handsets and the accompanying prepaid airtime to distributors and resellers who
in turn resell the prepaid wireless handsets to retailers. A consumer generally
purchases a cellular telephone handset and accompanying airtime from a retailer.
The consumer can then acquire additional airtime from the same retailer.
We are also a non-facilities based provider of prepaid
telecommunications services primarily to residential customers. We currently
offer pre-paid residential local and long distance telecommunications services
to consumers who reside in the state of Florida. With the pending acquisition of
Teleconnex, Inc. the company will be expanding into eight additional BellSouth
states. The Company markets its services to consumers who are unable to obtain
credit from the Incumbent Local Exchange Carrier (ILEC) or other Competitive
Local Exchange Carriers (CLECs). In particular, a significant number of
low-income individuals are unable to obtain local telephone service from the
ILEC or other CLECs, without a substantial deposit, because of a bad credit
history or no credit history at all. Most ILECs and CLECs provide local exchange
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and/or long distance telecommunications services strictly on a credit basis. We
provide our telecommunications services to these consumers only on a prepaid
basis.
Because no credit is involved, we can provide these services without
risk even when a security deposit cannot be provided by the consumer (which is
generally required by the ILEC or other CLECs when service is requested by
low-income, credit-deprived consumers). Our services are immediately available
to the customer after the establishment of an account and appropriate payment.
The service is ideal for consumers with limited income who are unable to obtain
credit from the ILEC or other CLEC, but who desire to place telephone calls from
their home.
We were incorporated in Colorado in July 1981 under the name Oil Field
Service Company, Inc. and in January 1986, we changed our name to Transamerican
Petroleum Company. In December 1998 we acquired Pre-Cell Solutions, Inc., a
Florida corporation, and subsequently changed our name to Pre-Cell Solutions,
Inc.
Strategic Acquisitions
On December 1, 1998, we acquired all of the outstanding capital stock
of Pre-Cell Solutions, Inc., a Florida corporation in exchange for 32,156,000
shares of our common stock. Pre-Cell Solutions was a non-facilities based
provider of prepaid telecommunications services primarily to residential
customers. 26,440,623 shares of our common stock that were delivered to the
shareholders of Pre-Cell Solutions were redeemed in April 2000.
On April 4, 2000, we acquired all of the outstanding capital stock of
US Intellicom, Inc., a Georgia corporation in exchange for 11,440,000 shares of
our common stock. Additionally, we established an option pool whereby certain
stockholders of US Intellicom who had guaranteed US Intellicom's bank line of
credit could until December 31, 2000, acquire 2,133,333 shares of our common
stock at an exercise price of $.75 per share. US Intellicom licenses software,
which is used to manage airtime usage on prepaid cellular telephones.
Also on April 4, 2000, we acquired all of the outstanding capital stock
of Pre-Paid Solutions, Inc., a Florida corporation in exchange for 20,219,127
shares of our common stock. Pre-Paid Solutions acquires wireless airtime from
facilities based carriers and resells that airtime through a network of
distributors and resellers.
Recent Developments
On August 2, 2000, we entered into a definitive agreement to acquire
all of the outstanding capital stock of Teleconex, Inc., a competitive local
exchange company (CLEC) located in Pensacola, Florida that provides prepaid
local telephone services to more than 5,000 customers in nine southeastern
states. The agreement is subject to a number of conditions, including, the
approval of applicable regulatory authorities. We have agreed to deliver 683,333
shares of our common stock to the Teleconex shareholders in connection with the
acquisition.
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We have also entered into a letter of intent to acquire Transnational
Communications, Inc., a competitive local exchange company located in San
Antonio, Texas that provides prepaid local telephone services to more than 6,000
customers in seven southern states. We have agreed to issue 1.1 million shares
of our common stock to the Transnational shareholders upon consummation of the
transaction. The letter of intent is non-binding and the consummation of the
merger remains subject to, among other things, regulatory approval, due
diligence, execution of a definitive agreement and the approval by the parties'
board of directors.
Industry Overview
Our markets for telecommunications services can be divided into two
sectors: (i) wireless services and (ii) prepaid dialtone.
Wireless Division
Industry data estimates that by the end of 1999, there were
approximately 86 million wireless subscribers yielding more than $40 billion in
gross revenues. Notwithstanding, more than thirty five percent of cellular
applicants are declined service due to credit issues. The Yankee Group has
predicted that prepaid subscribers currently account for five percent of the
wireless subscribers but will account for more than ten percent of the wireless
subscribers by 2002. Based upon the above estimates, the prepaid wireless
currently accounts for an estimated $3 billion in annual revenues and is
expected to account for more than $6 billion during 2002.
Prepaid Dialtone Division
The prepaid dialtone (home phone services) market is comprised of those
customers who are unable to obtain phone service from the local carrier due to
inability to pay past long distance bills or the high deposit fees necessary to
open an account. Currently, nearly 30 percent (30%) of all U.S. homes are
without either local or long distance service. According to telecom analyst The
Pelorus Group, the prepaid dialtone market is comprised of 8-10 million
customers in the United States, representing a potential annual gross revenues
of $6 billion, By 2003, prepaid dialtone will represent 32 percent (32%) of the
total prepaid market in the U.S.
Business Strategy
We are pursuing a growth strategy to capitalize on our early entrance
into the emerging and expanding markets for prepaid telecommunications services.
We intend to focus our sales and marketing efforts on the credit-challenged
consumer while also pursuing individual and business consumers who desire to
utilize our prepaid products and services as a means to budget their
telecommunications costs.
Wireless Division
Our business strategy for the technology division will continue to
focus on licensing our existing handset-based technology to competitive
resellers while continuing to research and develop new technology that will
enable us to introduce new products into the marketplace. Our software engineers
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will continue to research and develop the technology that will enable us to
expand our product line to include new and improved handsets and features.
Our EZ Prepaid division will pursue a strategy to establish broad
distribution of prepaid handsets and airtime throughout the United States and
Canada. We intend to focus our initial distribution efforts on reselling our
products to large distributors in the prepaid phone card industry. These
distributors have established relationships with retail outlets that cater to
credit-challenged consumers. We also intend to pursue large national and
regional retailers, truck stops, and convenience stores both directly and
through distributors who have established relationships with these retailers.
Prepaid Dialtone Division
Our growth strategy includes: (1) expanding our customer base within
the state of Florida; (2) expanding our customer base to include consumers who
reside in the 8 other states where BellSouth provides local exchange services
and where we have an agreement to acquire and re-sell local exchange services;
(3) expand, with proper licenses, our customer base to include consumers who
reside in non-BellSouth states where we can negotiate favorable re-sale
agreements with the ILEC or other facilities based CLECs; (4) offer our
customers a variety of other prepaid telecommunications products and services,
including, prepaid cellular, prepaid paging and other enhanced prepaid
telecommunications services; and (5) pursue the acquisition of companies that
fit within our Company's business strategy, such as Teleconex and Transnational.
Products and Services
Wireless Division
US Intellicom's digital technology has been approved by Sprint PCS to
be used by resellers within the Sprint network. The web-based USIntellinetSM
Internet Support System enables airtime providers to maintain and evolve their
prepaid offering in a cost effective manner. Unlike alternative options, the US
Intellicom system enables all program updates to be implemented over-the-air,
with no special demand on the customer without having to wait for operator
intervention. This adds a significant cost savings to the service provider and a
major convenience to the end-user over alternative methods.
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US Intellicom's debit application enables service providers to:
- Deliver fully featured cellular service without a contract;
- Establish an acceptable retail price point without carrier
subsidization;
- Lessen bad debt from the customer;
- Acquire new distribution with an off-the-shelf solution that
is easy to merchandise; and
- Provide end-users with a reliable, easy-to-use prepaid
wireless communications product.
US Intellicom targets three groups of customers, wireless airtime
service providers, both resellers and carriers and handset manufacturers.
Wireless Airtime Service Providers. The US Intellicom product delivers
to service providers' four primary benefits:
- Low cost to implement and operate;
- Quick entry to market (as little as 30 days to deploy);
- Ease and flexibility of program maintenance;
- Unique fraud protection features over competitive offerings;
and
- Ease of roaming across the carriers entire network.
Handset Manufacturers. The manufacturers benefit from US Intellicom
software applications by:
- Increased handset functionality;
- Increased selling advantage to their target customer (the
service provider);
- Opportunity for sell-on services, such as packaging and
program bundling; and
- The ability to respond to largest customers' demand for
quality proved debit application.
Pre-Paid Solutions acquires airtime from cellular carriers and re-sells
that airtime in the form of prepaid cellular service. Pre-Paid distributes the
cellular service, in some instances incorporating the US Intellicom technology,
through a network of distributors who in turn sell our products to retail
establishments. Pre-Paid Solutions provides the distributors and retailers with
a turnkey solution that is easily marketed and merchandised to the ultimate
consumer.
Prepaid Dialtone Division
Our wholly owned subsidiary, Pre-Cell Solutions, a Florida corporation,
offers credit-challenged consumers home telephone service regardless of credit
history or past due bills, and with no need for deposit or identification. We
provide our customers domestic and international long distance services through
a switching and customer account-based software application. Customers pay
approximately $50 to $70 per month for local telephone service with standard
features. Users are restricted from features unless they are paid in
advance.
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Sales and Marketing
Wireless Division
We originally entered the reselling analog service market because of
its wide availability and the initial lower cost of handsets. We have now
introduced the nation's first digital Code Division Multiple Access (CDMA)
prepaid handset under an exclusive agreement with Sprint PCS. Our objective is
to develop a significant position in the rapidly growing prepaid wireless market
in North America under a single established national brand across multiple
geographic positions. We intend to capitalize on the expected growth of the
prepaid industry and the large group of wireless users expected to replace their
current handsets and service.
We are building sales through direct and distributor sales forces and
upon reaching full sales staffing levels will be segmented into four sales
regions: West, Southwest, Northeast, and Southeast. Each Regional Sales Manager
(RSM) will be responsible for sales and marketing efforts within their
respective region and will reside initially in our Atlanta office to ensure that
a solid foundational understanding is built prior to investigating a
decentralized sales force. Each region represents between 50 - 60 target
prospects within our targeted channels of distribution. US Intellicom is also
utilizing the sales force of its distributor partners and through the Sprint PCS
Private Label Services (PLS) group, capitalizing on their established customer
bases.
Our Pre-paid Solutions division has entered into agreements to purchase
cellular airtime from numerous major cellular carriers at wholesale rates and
then resells the service to our customers at retail rates. As our subscriber
base grows the wholesale prices at which we acquire service will be reduced
under our volume discount based contracts. This should allow us to reduce our
retail prices or increase our margins in reaction to a changing marketplace. We
currently analyze the rate structures of each of the carriers in any given
market to select the most favorable resale terms. The increasing competition
among carriers and various technologies in the wireless market may also allow us
to arrange for more favorable "resale" arrangements.
We have also used these agreements to establish a national service
footprint that allows national, regional and local retailers to offer our
products to each of their storefronts in most metropolitan markets. This
approach should allow for the creation of a national "brand image" for our
product. This image could then be developed or supported by media advertising on
a broad basis. At a minimum, the product will be offered with a common name and
point-of-sale merchandising to establish and re-enforce the brand image. There
is currently no established national brand of prepaid wireless service today
that is offered broadly in the marketplace.
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US Intellicom's market penetration plan:
Through US Intellicom we are selling our wireless products to wireless
airtime providers and wireless airtime resellers, both domestically and
internationally. Equally important is the development of strategic relationships
with handset manufacturers such as those already established with Nokia, LG
Sansys and Qualcomm. In 1999, US Intellicom established key relationships with
one of the largest domestic reseller (STC / MCI), one of the largest RSA
Operator (Western Wireless); one of the largest PCS network operator (Sprint
PCS), and one of the largest handset manufacturer (Nokia).
Wireless Carriers: The immediate and primary focus within this channel
of distribution is in the RSA cellular carrier segment. RSA operators are in the
early stages of investigating prepaid alternatives to deliver to their customers
and are seeking quick and easy-to-use solutions that require minimal capital
investment. Network-based solutions can be costly and cumbersome for these
smaller operators, leaving intelligent handset applications as attractive
solutions. There are approximately 250 RSA operators throughout the United
States.
In addition, we will target medium sized operators in an effort to
penetrate their existing prepaid business which has been largely served to date
through switched based solutions. It is our belief that with additional handset
platforms, we have a strong opportunity to penetrate this segment of the carrier
market.
Wireless Resellers: Because wireless resellers must interconnect with
the carrier's switch for network-based solutions, handset based solutions are
increasingly becoming a popular alternative choice. US Intellicom's primary
focus within the reseller channel is to penetrate the top 10 resellers
domestically. US Intellicom has already executed agreements with several of the
top 10.
Agent/Dealer: Dealer/Agents allow for testing of the application on a
small scale and in a controlled environment. The agent/dealer channel will be
maintained by US Intellicom, but will not be a marketing target for us. By
focusing on the carrier and reseller channels of distribution, US Intellicom
will leverage our core competency of technological innovation through software
development. We strategically decided not to become involved with the reselling
of airtime, but to provide the tools necessary for airtime providers to offer
prepaid solutions to their customers.
EZ Prepaid's market penetration plan:
Distribution Plan: We are in the process of establishing national
distribution agreements. We have also completed, and are in the process of
executing, agreements with several distributors.
To date, we have focused our initial distribution channels on the
nation's largest prepaid long distance calling card distributors. This channel
has established relationships with thousands of retail storefronts that market
other prepaid telecommunications products to credit-challenged consumers. The
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introduction of prepaid cellular to this established distribution channel is a
natural evolution of a new product line. Prepaid wireless should provide these
distributors with a new product to distribute in an existing distribution
channel that will capitalize on their already existing relationships with
resellers.
We will also market our products, both directly through internal sales
staff and through national and regional distributors, to truck stops,
convenience stores and other national and regional chain stores. Our wireless
telephones, because of the national footprint, fills a need of the national
retailer of a single Stock Keeping Unit (SKU) or product number that can be
distributed from centralized warehouse to any store in the country without the
need of expensive, labor intensive specialized programs of each individual
phone.
The most powerful migration of the product from the "Credit Challenged
Focus" to a sexy target-branded and packaged "HIP" product will help penetrate
mainstream America - specifically, the teen and young adult market. We believe
with the right mix of product pricing, brand, packaging and image can infiltrate
this market niche.
Merchandising: We have created packaging, posters, airtime cards,
brochures and product display demo packages currently being distributed in to
the market place. Currently, distributors are required to purchase these
merchandising materials for distribution. It is our intention to supplement
these materials with a regionally based national advertising campaign to
facilitate and support our distribution network.
Retail Distribution: Prepaid wireless services allow retailers to sell
a phone in the box within any retail environment. Unlike wireline services or
postpaid wireless services where a significant credit approval process must take
place and detailed customer order information must be acquired and processed,
acquiring prepaid wireless service can be as simple as purchasing any other
standard consumer electronic device. The airtime or minutes become a commodity
to consumers, purchased as needed, similar to a consumer's purchase of fuel for
their automobile.
There are several important factors facilitating this move towards a
"phone in a box" concept. The product must be positioned as a simple solution,
which is easy to understand through the product's packaging. The retail model
does not provide for trained sales agents demonstrating the product over
consumers' objections.
Pricing: We have developed a pricing structure that can offer
attractive rates to higher usage customers who are willing to prepay for service
at higher volume levels, and reasonable market rates for average use customers.
We have also created an attractive special pricing plan for low-use customers
who desire the safety aspect of a cell phone but do not anticipate significant
usage. Customers who want to retain their phone number and keep their service
active in a period of temporary low usage can use this same price plan.
The product's pricing is flat rate and simple to understand. For
example, digital pricing is as low as $.39 per minute, including roaming and
long distance. Further, the user's minutes never expire as long as they purchase
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a card every 30 days. This plan is very competitive to the prepaid market place.
Initially, we will be offering an incentive rebate plan to consumers.
Prepaid Dialtone Division
Advertising: Our marketing plan is to increase sales by converting
disconnected telephone users to users of prepaid local telephone service. The
media objectives will be to reach female adults 18-34 with an annual income of
less than $13,000. The strategy is to use traditional and non-traditional media
to reach this target customer. The message will have a consistent exposure to
create awareness and maintain image in current customers. The media and vehicles
chosen for our campaign will be television, radio, newspaper and transit, since
they gain local advertising impressions.
Twenty-five percent (25%) of these customers are more likely to watch
television from 9:00 a.m. to 1:00 p.m.; 32 percent (32%) most often watch from
1:00 p.m. to 4:30 p.m. The campaign will add radio spots during morning and
afternoon drive hours. We will also set up bus placards (signs) in markets
across the southeast region. According to public records, 80 percent (80%) of
transit riders have an income less than $15,000, with 61 percent of them being
women. We also intend to advertise through direct marketing programs, which will
enhance income base and ethnic attributes.
Competition
The telecommunications industry in general, and the cellular telephone
industry in particular, is highly competitive. Our prepaid wireless services
compete with local, regional and national cellular service companies, some of
which have substantially more experience and greater financial, technical and
other resources than us. Additionally, our CLEC services compete with local and
regional CLEC, and to some extent ILEC, service companies.
In the prepaid dialtone industry there are a few competitors (in
BellSouth region) that have developed a percentage of the untapped market share.
These companies are all reselling from the RBOC's facility and direct selling
the local phone service to the prepaid dialtone customer. Our competitors
include Now Communications, CommSouth, Smoke Signal, Newphone, Budget Phone and
1-800-Reconex. Installation fees range from $20 to $60, with monthly costs for
recurring service from $49.95 to $69.95.
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Employees
As of April 30, 2000, we had approximately 32 full-time employees; 6 in
management, 16 in administration, 6 in sales and service and 4 in technical
positions. None of the employees are members of a labor union and we have not
experienced any work stoppages. We believe that our relations with our employees
are good.
RISK FACTORS
This Form 10-K contains forward-looking statements relating to future
events or our future financial performance. You are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, you should specifically consider the
various factors identified in this Form 10-K, including those discussed below,
which could cause actual events or results to differ materially from those
indicated by the forward-looking statements.
Financial Risks
We are currently engaged in two lawsuits that may result in substantial monetary
damages or the loss of use of certain technology.
We are currently the named defendants in two lawsuits brought by two
cellular technology companies. These lawsuits allege that, among other things,
that our software products infringe their respective patents. We cannot assure
you that we will be successful in defending these lawsuits, and we may be
required to pay license fees or substantial damages that far exceed our
resources. We also may be required by the courts to cease our use of certain
technologies. Furthermore, we are not covered by insurance for any anticipated
costs of the lawsuit or any possible settlements or licenses. If successful,
either of these lawsuits could seriously harm our business by forcing us to
cease providing certain products to our customers or requiring us to pay
monetary damages. Even if unsuccessful, these claims still can harm our business
severely by damaging our reputation, requiring us to incur legal costs, lowering
our stock price and public demand for our stock, and diverting management's
attention away from our primary business activities in general. See "Item 3.
Legal Proceedings."
We have a history of operating losses and expect to continue to realize losses
and we may not become profitable or be able to sustain profitability, which may
cause our stock price to fall.
Since our inception we have incurred significant net losses. For the
fiscal year ended April 30, 2000, we lost approximately $1,240,000. Our
accumulated deficit as of April 30, 2000 was approximately $2,758,000. The
report of our independent certified public accountants on the consolidated
financial statements includes an explanatory paragraph that states we have
suffered recurring losses from operations, have negative working capital and
cash used in operating activities and have a shareholders' deficit that raises
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
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outcome of this uncertainty. We expect substantial net losses and negative cash
flow for the foreseeable future. The size of these losses will depend, in large
part, on our ability to realize revenues from marketing our products. Our
ability to generate revenues will be dependent upon, among other things, the
successful negotiation of licensing agreements, the marketing of our products
and the possible sale of our technology. Should we achieve profitability there
is no assurance we can maintain or increase our level of profitability in the
future.
In addition, the report of our independent certified public accountants
on the consolidated financial statements includes an explanatory paragraph on
various legal matters that we are named as defendant. The outcomes of these
matters cannot be presently determined, but an unfavorable conclusion may have
an adverse effect on our financial condition, results of operations and cash
flows.
Because our revenues prior to April 2000 resulted solely from our competitive
local exchange carrier business, you may have difficulty evaluating our
business.
We only began offering products and services from our wireless
technology and services division in April 2000. Consequently, we have a very
limited operating history upon which you may base an evaluation of us and
determine our prospects for achieving our intended business objectives. We are
prone to all of the risks inherent to the establishment of any new business
venture. You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks, and complications frequently encountered
by similarly situated companies in the early stages of development, particularly
companies in the rapidly changing telecommunications market. To address these
risks, we must, among other things:
- Implement and successfully execute our business and marketing
strategy;
- Continually update and improve our product and service
offerings;
- Continue to develop and upgrade our technology;
- Increase our client base;
- Respond to competitive developments; and
- Attract, retain and motivate qualified personnel.
We may not be successful in addressing these risks, and our failure in
this regard could have a material adverse effect on our business, prospects,
financial condition and results of operations.
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Unless we obtain additional financing, we may not be able to meet our strategic
business objectives.
We will need significant additional capital to fund our business plan.
We plan to satisfy part of this need by a private offering of our securities in
the near future and by additional financing as soon as practicable. This will
likely result in dilution of existing equity positions. In addition, new
securities may contain certain rights, preferences or privileges that are senior
to those of our common stock. We cannot assure you that capital will be
available to us when we need it or at all. If we are unable to obtain capital
when we need it, we may delay or abandon our development and expansion plans.
That could have a material adverse effect on our business and financial
condition.
Fluctuations in our operating results may affect our stock price.
Our annual and quarterly revenue and results could fluctuate as a
result of a number of factors, including:
- Variations in the rate of timing of customer orders;
- Variations in our provisioning of new customer services;
- The speed at which we expand our network and market presence;
- The rates at which customers cancel services, or churn;
- Costs of third party services purchased by us; and
- Competitive factors, including pricing and demand for
competing services.
As a result of these factors, in or more future quarters, our operating
results may fall below the expectations of securities analysts and investors. In
this event, the market price of our common stock would likely be materially
adversely affected.
We expect to experience volatility in our stock prices.
The trading price of our common stock is likely to be volatile. The
stock market in general, and the market for technology and telecommunications
companies in particular, has experienced extreme volatility. These broad market
and industry fluctuations may adversely affect the price of our common stock,
regardless of our operating performance.
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Other factors that could cause the market price of our common stock to
fluctuate substantially include:
- Announcements of developments related to our business, or that
of our competitors, our industry group or our customers;
- Fluctuations in our results of operations;
- Hiring or departure of key personnel;
- A shortfall in our results compared to analysts' expectations
and changes in analysts' recommendations or projections;
- Sales of substantial amounts of our equity securities into the
marketplace;
- Regulatory developments affecting the telecommunications
industry or data services; and
- General conditions in the telecommunications industry or the
economy as a whole.
Risks Related to Our Business Model
If we do not successfully execute our new business strategy, we may be unable to
compete effectively.
Our business strategy is complex and requires that we successfully
complete many tasks, a number of which we must complete simultaneously. If we
are unable to effectively implement or coordinate the implementation of these
multiple tasks, we may be unable to compete effectively in our markets and our
financial results may suffer.
We depend on management to integrate our acquisitions and to manage our growth.
Our business strategy includes growth through acquisition and internal
development. We are subject to various risks associated with our growth
strategy, including the risk that we will be unable to identify and recruit
suitable acquisition candidates in the future or to integrate and manage the
acquired companies.
We completed the acquisitions of Pre-Paid Solutions, Inc. and US
Intellicom, Inc. and are in the process of integrating these operations. The
history, geographical location, business model and business culture are
different from ours in many respects. Our directors and senior management face a
significant challenge in their efforts to integrate our businesses and the
business of the acquired companies or assets, and to effectively manage our
continued growth. There can be no assurance that our efforts to integrate the
operations of either Pre-Paid Solutions or US Intellicom and the acquired assets
will be successful, that we can manage our growth or that the anticipated
benefits of Pre-Paid Solutions and US Intellicom or their assets will be fully
realized. The dedication of management resources to such efforts may detract
attention from our day-to-day business. There can be no assurance that there
will not be substantial costs associated with such activities or of the success
of our integration efforts, either of which could have a material adverse effect
on our operating results.
14
<PAGE>
Changes to the regulations applicable to our business could increase our costs
and limit our operations.
We are subject to federal, state, and local regulation of our local,
long distance, and wireless services. The outcome of the various administrative
proceedings at the federal and state level and litigation in federal and state
courts relating to this regulation as well as federal and state legislation may
increase our costs, increase competition and limit our operations.
Rapid technological changes in the telecommunications industry could render our
services or network obsolete faster than we expect or require us to spend more
than we currently anticipate.
The telecommunications industry is subject to rapid and significant
changes in technology. Any changes could render our services or network
obsolete, require us to spend than we anticipate or have a material adverse
effect on our operating results and financial condition. Advances in technology
could also lead to more entities becoming our direct competitors. Because of
this rapid change, our long-term success will increasingly depend on our ability
to offer advanced services and to anticipate or adapt to these changes, such as
evolving industry standards. We cannot be sure that:
- We will be able to offer the services our customers require;
- Our services will not be economically or technically outmoded
by current or future competitive technologies;
- Our network or our information systems will not become
obsolete;
- We will have sufficient resources to develop or acquire new
technologies or introduce new services that we need to
effectively compete; or
- Our cost of providing service will decline as rapidly as the
costs of our competitors.
Risks Related to Sales, Marketing and Competition
Our market is highly competitive, and we may not be able to compete effectively,
especially against established competitors with greater financial resources and
more experience.
We operate in a highly competitive environment. We have no significant
market share in any market in which we operate. We will face substantial and
growing competition from a variety of data transport, data networking, telephony
service and integrated telecommunications service providers. We also expect that
the incumbent local exchange carriers ultimately will be able to provide the
range of services we currently offer. Many of our competitors are larger and
better capitalized than we are, are incumbent providers with long-standing
customer relationships, and have greater name recognition. We may not be able to
compete effectively against our competitors.
15
<PAGE>
Risks Related to Operations
We depend on other companies for cellular phones and the wireless network on
which our products work.
We do not manufacture cellular phones for our customers nor do we
provide the wireless network on which our customers' cellular phones work.
Therefore, we are dependent on others for the supply and assembly of our
products and the networks on which our products work. Additionally, we do not
have long term contracts with suppliers for the purchase and delivery of
cellular phones or contracts with network service providers. Any interruption of
supply of cellular phones or the access to wireless networks, for any reason,
could result in significant delivery delays, thereby adversely affecting our
marketing efforts, customer relations, revenues and profitability.
Our information systems may not produce accurate and prompt bills, which could
cause a loss or delay in the collection of revenue and could adversely affect
our relations with our customers.
We depend on our information systems to bill our customers accurately
and promptly. Because of the deployment of our network and our expansion plans,
we are continuing to upgrade our information systems. Our failure to identify
all of our information and processing needs or to adequately upgrade our
information systems could delay our collection efforts, cause us to lose revenue
and adversely affect our relations with our customers.
We depend on the networks and services of third party providers to serve our
customers and our relationships with our customers could be adversely affected
by failures in those networks and services.
We depend almost entirely on other carriers for the switching and
transmission of our customer traffic. After we complete deploying our network,
we will still rely to some extent on others for switching and transmission of
customer traffic. We cannot be sure that any third party switching or
transmission facilities will be available when needed or on acceptable terms.
Although we can exercise direct control of the customer care and
support we provide, most of the services we currently offer are provided by
others. These services are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security and other factors, which may
cause interruptions in service or reduced capacity for our customers. These
problems, although not within our control, could adversely affect customer
confidence and damage our relationships with our customers.
16
<PAGE>
We may be unable to retain or replace our senior management or hire and retain
other highly skilled personnel upon which our success will depend.
We believe that our continued success will depend upon the abilities
and continued efforts of our management, particularly members of our senior
management team. The loss of the services of any of these individuals could have
a material adverse effect on our business, results of operations and financial
condition. Our success will also depend upon our ability to identify, hire and
retain additional highly skilled sales, service and technical personnel. Demand
for qualified personnel with telecommunications experience is high and
competition for their services is intense. If we cannot attract and retain the
additional employees we need, we will be unable to successfully implement our
business strategy.
Item 2. Properties
We are headquartered in Melbourne, Florida where we lease approximately
7,800 square feet of office space from Thomas E. Biddix, our Chief Executive
Officer and Chairman. The lease expires in June 2005 and the monthly rent
expense under such lease is approximately $4,875. We also lease 7,849 square
feet of office space in Norcross, Georgia. The lease expires in August 2004 and
the monthly rent expense is approximately $5,017.
Item 3. Legal Proceedings
On May 6, 1991 Telemac Cellular Corporation filed suit against US
Intellicom, Inc., our wholly owned subsidiary, in the Northern District of
California. Telemac Cellular alleges patent infringement arising out of US
Intellicom's use of its prepaid cellular software products. Telemac is seeking,
among other relief, an undetermined amount of damages. As there are numerous
disputed facts and because Telemac has yet to quantify its claim, we cannot
provide a range of potential loss.
On September 21, 1999, two of our subsidiaries were named as defendants
in lawsuits filed by Topp Telecom, Inc., alleging patent infringement arising
out of having made, used, offered for sale and/or sold in the United States
products which infringe one or more claims of Patent No. 5,613,947 and Patent
No. 5,577,100. The claim for monetary damages are undisclosed. As this
litigation is in the early stages, and Topp Telecom has yet to quantify its
claim, we cannot provide a range of potential loss.
On March 7, 2000 RiverHawk Capital Resources instituted an action
against US Intellicom, Inc., in the Superior Court of Fulton County, Georgia.
RiverHawk Capital Resources alleged breach of contract against U.S. Intellicom
seeking damages in excess of $300,000 in connection with a "success fee",
pursuant to the letter agreement dated October 27, 1998 between RiverHawk
Capital Resources and US Intellicom, on account of the merger transaction among
U.S. Intellicom, Pre-Cell Solutions and USI Merger Corp. effective April 5,
2000. The complaint was amended to allege that a "success fee" of $2.5 million
was owed to RiverHawk Resources. An arbitrator ruled on June 9, 2000 that US
Intellicom pay to RiverHawk $374,517 as the success fee, plus expenses for the
arbitration proceeding. On July 24, 2000 US Intellicom filed a Response to the
17
<PAGE>
claim and an Application to Vacate the Award in Arbitration. In the event of the
arbitrators decision being upheld, we will be required to pay to RiverHawk
$374,517.
From time-to-time, we are involved in other legal proceedings
incidental to the conduct of our business. We believe that this other
litigation, individually or in the aggregate, to which we are currently a party
is not likely to have a material adverse effect on our business, financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the
fiscal quarter ended April 30, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock, $.01 par value per share, began trading on the OTC
Bulletin Board under the symbol "TAMP." In December 1998, we changed our trading
symbol to "TDCM". The following table sets forth, for the periods indicated, the
range of the high and low bid prices for the common stock for the calendar
period indicated as reported by the OTC Bulletin Board. The quotes represent
"Inter-dealer" prices without mark ups, markdowns or commissions and may not
necessarily represent actual transactions. This table gives retroactive effect
to reverse stock split at the rate of 1:7 effected December 1998.
Price Range of
Common Stock
-------------------------
High Low
------------- -----------
Fiscal Year Ended April 30, 1999:
First Quarter............................. $ .10 $ .002
Second Quarter............................ .32 .02
Third Quarter............................. 2.25 .12
Fourth Quarter............................ .375 .03
Fiscal Year Ended April 30, 2000:
First Quarter ............................ $ .50 $ .03
Second Quarter............................ .60 .14
Third Quarter ............................ .51 .156
Fourth Quarter............................ 7.00 .312
On August 10, 2000, the last reported bid price of the common stock on
the OTC Bulletin Board was $1.375. As of the same date, there were approximately
699 holders of record of the common stock.
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<PAGE>
We have not paid any dividends in the past and presently anticipate
that earnings, if any, will be retained for the development of our business and
that we will not declare dividends on the common stock in the foreseeable
future. Any future dividends will be subject to the discretion of our Board of
Directors and will depend upon, among other things, our future earnings,
operating and financial condition, capital requirements and general business
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources."
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial
data. The selected statement of operations data and balance sheet data for the
years ended April 30, 1996, 1997, 1998 and 1999 are derived from our financial
statements which have been audited by Vestal & Wiler, P.A., independent
certified public accountants. The selected statement of operations data and
balance sheet data for the year ended April 30, 2000 are derived from our
Consolidated Financial Statements, which have been audited by BDO Seidman, LLP,
independent certified public accountants. The financial statements for the years
ended April 30, 1996 and 1997 are not presented in this filing. The Selected
Consolidated Financial Data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the Consolidated Financial Statements and the notes thereto, and
the report of our independent certified public accountants, appearing elsewhere
herein.
Selected Statements of Operations Data:
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C>
Revenues 358,113 22,936 -- -- --
Gross Margins 161,940 5,596 -- -- --
Operating expenses 865,981 108,962 (341) -- --
Goodwill amortization 134,038 43,000 -- -- --
Impairment loss 388,520 -- -- -- --
Operating income (loss) (1,092,561) (103,366) 341 -- --
Interest and other 14,330 -- -- -- --
Net income (loss) (1,240,929) (146,363) 341 -- --
Net (loss) per common share,
basic and diluted (0.04) (0.01) -- -- --
Weighted average number of shares 34,365,210 11,846,985 11,846,985 14,999,623 11,846,985
19
<PAGE>
Summary Consolidated Balance Sheet Data:
<CAPTION>
Fiscal Year Ended April 30,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C>
Working capital (deficit) (626,367) (342,141) -- -- --
Goodwill, net 18,331,219 1,480,302 -- -- --
Total assets 20,245,099 1,493,522 -- -- --
Accumulated deficit (2,757,885) (1,516,956) (1,370,590) (1,370,590) (1,370,931)
Stockholders' equity 18,182,348 1,139,874 -- -- --
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains certain "forward-looking statements" within the
meaning of section 27a of the securities act of 1933, and section 21e of the
securities exchange act of 1934. The words "believe," "expect," "anticipate,"
"estimate," "project," "intend" and similar expressions identify forward-looking
statements, which speak only as of the date each such statement was made.
Forward-looking statements may include, but not be limited to,
projections of revenues, income or loss, plans for acquisitions and expansion,
integration of new operations, financing needs, industry trends, consumer demand
and levels of competition, as well as assumptions relating to these matters.
These statements by their nature involve substantial risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those expressed in, contemplated by or
underlying any such forward-looking statements. Statements contained in this
"management's discussion and analysis of financial condition and results of
operations," in "risk factors," in the notes to the financial statements and
elsewhere in this report describe factors, among others, that could contribute
to or cause such differences.
The following discussion and analysis regarding our consolidated
financial position and consolidated results of operations should be read in
conjunction with the financial statements and related notes thereto included
elsewhere in this report.
General
Since 1995, we were inactive but structured to take advantage of
business opportunities which management believed would be in the best interest
of our shareholders. In December 1998, we acquired Pre-Cell Solutions (a Florida
corporation) through the issuance of 32,156,000 shares of our common stock and
we changed our name to Pre-Cell Solutions, Inc. In April 2000, we acquired
Pre-Paid Solutions and US Intellicom through the issuance of 31,659,127 shares
of our common stock. We currently offer prepaid wireless, long distance and
local telecommunication products and services through distributors and resellers
as well as licensing prepaid wireless technology to other wireless resellers.
20
<PAGE>
Historical Results of Operations
Year ended April 30, 2000 compared to year ended April 30, 1999
Revenues for the year ended April 30, 2000 were $358,113 up $335,177
from $22,936 for the year ended April 30, 1999. Approximately 43% of this
increase, or $143,616, resulted from an increase in revenues of our CLEC
business that reported twelve months of operations in the year ended April 30,
2000 as compared to five months of operations in the year ended April 30, 1999.
Of the remaining $191,561 of the increase, $75,946 resulted from the acquisition
of Pre-Paid Solutions, Inc. and $115,615 resulted from the acquisition of US
Intellicom, Inc., both of which occurred in April 2000, the last month of our
fiscal year.
Direct costs for the year ended April 30, 2000 were $196,173 up
$178,833 from $17,340 for the year ended April 30, 1999. Of this increase,
$131,005 resulted from an increase of our CLEC business that reported twelve
months of operations in the year ended April 30, 2000 as compared to five months
of operations in the year ended April 30, 1999. The acquisition of Pre-Paid
Solutions accounted for $44,561 of the increase and the acquisition of US
Intellicom accounted for $22,932 of the increase.
All other operating expenses increased $757,019 from $108,962 in the
year ended April 30, 1999 to $865,981 in the year ended April 30, 2000. The
acquisition of Pre-Paid Solutions accounted for $88,378 of the increase and the
acquisition of US Intellicom accounted for $201,000 of the increase. The
remaining balance of the increase ($467,641) was primarily the result of the
increase in corporate overhead as the company emerged from an inactive entity
and began to establish the infrastructure necessary to accomplish our strategic
business plans.
In the fiscal year ended April 30, 2000, we recognized an impairment
loss of $388,520 in connection with a reduction in the carrying amount of
purchased technology that did not exist in the prior fiscal year.
The amortization of goodwill was approximately $134,000 for the fiscal
year ended April 30, 2000 as compared to $43,000 for the year ended April 30,
1999. This increase was the result of an increase in goodwill of approximately
$17,000,000 associated with the acquisitions of Pre-Paid Solutions and US
Intellicom that occurred in April 2000. This increase reflects only one-month
amortization in the current period, which will be in excess of $800,000 annually
in future reporting periods.
Net loss for the year ended April 30, 2000 was $1,240,929 as compared
to a loss of $146,366 for the year ended April 30, 1999. This increase in net
loss of $1,094,563 is primarily the result of the combined effects of the
increased other operating expenses of $757,019, impairment loss of $388,520 and
increased goodwill amortization of $91,000 offset by increased revenues as
discussed above.
21
<PAGE>
Year ended April 30, 1999 compared to year ended April 30, 1998
The operating results as reported in our financial statements for the
year ended April 30, 1999 are all the result of the acquisition of Pre-Cell
Solutions, Inc. (a Florida corporation). Since we had been inactive for the year
ended April 30, 1998 there is no comparative analysis for these two periods.
Liquidity and Capital Resources
For the year ended April 30, 2000, net cash used in operating
activities was $1,256,102. This was mainly due to the operating loss for the
period. As of April 30, 2000, we had cash of $383,333 and a net working capital
deficit of $626,367.
Net cash provided from investing activities for the year ended April
30, 2000 was $3,504,475. This availability of cash is attributable to the cash
that was obtained from the acquired companies of Pre-Paid Solution and US
Intellicom, which had $3,581,396 in cash at the date of the business
combinations.
During the year ended April 30, 2000, we used $1,878,547 for debt
repayments primarily as a paydown on a line of credit outstanding on US
Intellicom at the date of acquisition of approximately $1,600,000.
Our ability to meet our future obligations in relation to the orderly
payment of our recurring, general and administrative expenses on a current basis
is dependent on our ability to expand our current customer base, secure and
develop new business opportunities and raise additional capital. We are unable
to predict how long it may be able to survive without a significant infusion of
capital from outside sources and we cannot predict whether such capital
infusion, if available, will be on terms and conditions favorable to us.
The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. However, absent
our ability to execute our plans to expand our current customer base, secure and
develop new business opportunities and raise additional capital, we may be able
to continue as a going concern, which could significantly impact the liquidation
or settlement value of our assets and liabilities.
22
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
None
Item 8. Financial Statements
Our consolidated financial statements for the years ended April 30,
2000, 1999 and 1998, and the respective notes thereto, and set forth elsewhere
in this report. An index of the financial statements appears in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On July 14, 2000, Vestal & Wiler was dismissed as our independent
auditors and replaced with BDO Seidman, LLP. Vestal & Wiler's report on the
financial statements for the fiscal years ended April 30, 1997, 1998 and 1999
did not contain any adverse opinion, any disclaimer of opinion, nor has any
opinion been qualified or modified as to uncertainty, audit scope or accounting
principles. During our two most recent fiscal years and subsequent interim
periods preceding the change in independent auditors, we had no disagreements
with Vestal & Wiler on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure. Our Board of
Directors approved the replacement of Vestal & Wiler with BDO Seidman, LLP.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information regarding our directors and
executive officers.
Name Age Position
---- --- --------
Thomas E. Biddix 31 Chief Executive Officer and Chairman
Thomas E. Fricks 52 President and Chief Operating Officer
Harry O. Christenson 56 Chief Financial Officer
Timothy F. McWilliams 37 Executive Vice President and Director
Mark A. Krentzman 46 Director
Each director will hold office until their term expires and until his
or her successor at an annual meeting of shareholders is elected and qualified
or until his or her earlier resignation or removal. Each officer serves at the
discretion of the board of directors.
Thomas E. Biddix. Since December 1998, Mr. Biddix has served as our
Chief Executive Officer and Chairman of the Board of Directors and from December
1998 until April 2000 as our President. From May 1997 until December 1998, Mr.
23
<PAGE>
Biddix served as Chief Executive Officer, President and Chairman of the Board of
Directors of Pre-Cell Solutions, Inc., a Florida corporation. Since March 1997
Mr. Biddix has served as the Chief Executive Officer, President and Chairman of
the Board of Directors of Pre-Paid Solutions. From February 1996 until October
1996, Mr. Biddix was General Manager of Suntree Cellular, Inc., a Florida based
AT&T authorized cellular dealer. From March 1994 until June 1996, Mr. Biddix was
a real estate salesman for RE/MAX Alternative Realty.
Thomas E. Fricks. Since April 2000, Mr. Fricks has served as our
President and Chief Operating Officer. From June 1999 through March 2000, Mr.
Fricks served as the President and Chief Operating Officer of U.S. Intellicom.
From March 1997 until April 1999, Mr. Fricks served as a director of
PeopleMover, Inc., a software provider for recruiting and staffing companies.
From June 1997 until June 1999, Mr. Fricks served as Vice President of North
American Operations of LHS Group LLC, a software provider of wireless billing
systems. From June 1994 through May 1997, Mr. Fricks served as the Vice
President and Chief Information Officer of Norrell, Inc., a temporary staffing
company.
Harry O. Christenson. Since May 2000, Mr. Christenson has served as our
Chief Financial Officer. Since October 1997, Mr. Christenson has served as
President of Intergra Group International, a Financial Consulting Firm. From
February 1995 until September 1997, Mr. Christenson served as Chief Financial
Officer and from February 1995 until September 1997 as Chairman of the Board of
Directors of Octagon, Inc., a provider of technician services for the nuclear
power industry and a government contractor.
Timothy F. McWilliams. Since April 2000, Mr. McWilliams has served as
our Executive Vice President and as a director since December 1998. From
December 1998 until April 2000, Mr. McWilliams served as our Chief Operating
Officer. From May 1997 until December 1998, Mr. McWilliams served as Chief
Operating Officer, Secretary and director of Pre-Cell Solutions, Inc., a Florida
corporation. Since March 1997, Mr. McWilliams has served as Chief Operating
Officer of Pre-Paid Solutions. From March 1994 until December 1999, Mr.
McWilliams served as President of RE/MAX Alternative Realty and RE/MAX II,
Florida based real estate brokerages. Since January 1994, Mr. McWilliams has
also served as President of Ventana Development Company, Inc. a developer of
single family residential developments.
Mark A. Krentzman. Since April 2000, Mr. Krentzman has served as our
director. From December 1998 until July 2000, Mr. Krentzman served as Executive
Vice President of VoCall Communication, Inc., a facilities based provider of
telecommunications products and services. From August 1996 until November 1998,
Mr. Krentzman served as Chief Financial Officer and a director of LifeWeb LLC, a
provider of a web enabling software tool for the life insurance industry.
Compliance with Section 16(a) of the Exchange Act
The Exchange Act requires our executive officers, directors, beneficial
owners of more than 10% of a class of our equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
24
<PAGE>
(the "Commission"). To date we are not in compliance with Section 16(a) of the
Exchange Act. Our officers and directors intend to file their forms 3 and 4 as
soon as practicable.
Item 11. Executive Compensation
The following table summarizes the aggregate compensation paid during
each of the years ended April 30, 1998, 1999, and 2000 to our Chief Executive
Officer (the "CEO") and to each of our executive officers who had annual
compensation in excess of $100,000. The CEO and such other executive officers
are sometimes referred to herein as the "Names Executives."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND ---------------------- ----------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS ($) OPTIONS (#) COMPENSATION ($)
------------------ ---- --------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas E. Biddix 1998 $0 $0 0 $0
Chief Executive Officer and 1999 $75,000(1) $0 4,000,000(3) $0
Director 2000 $180,000(2) $0 0 $0
</TABLE>
(1) Of this amount, $75,000 was accrued
(2) Of this amount, $15,000 was paid and the balance of $165,000 was accrued.
(3) 3,129,221 of these options were redeemed to us in April 2000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No options were granted to any Named Executive Officers during the
fiscal year ended April 30, 2000. However, Thomas E. Biddix, in connection with
the acquisition of Pre-Paid Solutions, received options acquire an aggregate of
169,149 shares of our common stock at an exercise price of $ .39 per share and
options to acquire an aggregate of 704,788 shares of our common stock at an
exercise price on $ .18 per share in exchange for his outstanding options to
purchase common stock of Pre-Paid Solutions.
25
<PAGE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES (1)
The following table sets forth information concerning the value
realized by the Named Executives upon exercise of stock options during the
fiscal year ended April 30, 2000, and the value of unexercised stock options
held by the Named Executives at April 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL OPTIONS AT
SHARES YEAR-END (#) FISCAL YEAR-END ($) (1)
ACQUIRED ON VALUE ------------ -----------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Biddix 250,000 $250,000 1,494,716 -- $1,837,574 --
</TABLE>
(1) The dollar value of the unexercised in-the-money options is calculated
based upon the difference between the option exercise price and $1.375
per share, being the closing bid price of our common stock on August
10, 2000 as reported by the OTC Bulletin Board.
(2) Of such exercisable options, as of August 10, 2000, 620,779 options
were exercisable at $.04 per share, 169,149 options were exercisable at
$.39 per share and 704,788 options were exercisable at $.18 per share.
Employment Agreements
On April 1, 2000, we entered into employment agreements with Thomas E.
Biddix, our Chief Executive Officer and a director, and with Timothy F.
McWilliams, our Executive Vice-President. The agreements with each of Messrs.
Biddix and McWilliams are substantially similar and superseded in their entirety
previous employment agreements with each of Messrs. Biddix and McWilliams. The
term of the agreements are for three years from April 1, 2000 unless sooner
terminated or extended. The annual salary under each of the agreements for
Messrs. Biddix and McWilliams is $250,000 and $150,000, respectively.
The agreements also provide, among other things, for: (i) participation
in any employee benefits applicable to our employees and executives, (ii) an
automobile allowance and fringe benefits commensurate with the duties and
responsibilities of Messrs. Biddix and McWilliams and (iii) contain certain
non-disclosure and non-competition provisions. Additionally, Messrs. Biddix and
McWilliams may be awarded bonuses by our board of directors.
Under the terms of the agreements, we may terminate the employment of
Mr. Biddix or Mr. McWilliams either with or without cause. If the agreements are
terminated by us without good cause, we would be obligated to pay that executive
an amount equal to the salary due that executive throughout the remaining term
of the agreement. In the event Mr. Biddix or Mr. McWilliams were terminated
without cause during the final year of their employment term, we would be
obligated to pay that executive an amount equal to the greater of: (i) the
salary due the executive through the remaining employment or (ii) the salary due
executive for a period of six (6) calendar months. In the event an executive
terminates the agreement upon the company materially breaching the provision of
the agreement, we would be obligated to pay that executive an amount equal to
the salary due executive through the term of employment.
26
<PAGE>
Compensation of Directors
Our directors are not compensated for their services.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to us with
respect to the beneficial ownership of our common shares as of July 17, 2000 by
(i) each shareholder known by us to be the beneficial owner of more than 5% of
our common shares, (ii) each director of Pre-Cell Solutions, (iii) each
executive officer of Pre-Cell Solutions named in the Summary Compensation Table
which appears in Item 11, and (iv) all executive officers and directors as a
group.
Shares Beneficially Owned
-------------------------
Name and Address of Beneficial Owner (1) Number Percent (2)
---------------------------------------- ------ -----------
Thomas E. Biddix (3) 8,947,542 21.64%
Thomas E. Fricks (4) 1,448,533 3.55%
Harry O. Christenson (5) 369,825 *
Timothy F. McWilliams (6) 1,891,276 4.61%
Mark A. Krentzman 0 *
Ronald Kindland (7) 3,195,667 7.89%
Dan Fitzgerald (8) 3,545,418 8.61%
Jonathan K. O'Neal (9) 2,508,000 6.31%
Michael A. Sauter (10) 2,508,000 6.31%
Executive officers and directors
as a group (5 persons) 12,657,176 28.97%
---------------------
* Represents beneficial
ownership of less than 1%.
(1) Unless otherwise noted, the address of each shareholder is our address,
which is 385 East Drive, Melbourne, Florida 32904.
(2) Percentage of ownership is based on 39,851,859 shares outstanding as of
August 10, 2000. Common shares subject to options currently exercisable or
exercisable within 60 days of August 10, 2000 and deemed outstanding for
the purpose of computing the percentage ownership of the person holding
such options, but are not deemed outstanding for computing the percentage
ownership of any other person. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(3) This amount includes (i) 3,942,034 shares of common stock held in the name
of Thomas E. Biddix TSRLT utd. and (ii) options to acquire an aggregate of
620,779 shares of common stock at an exercise price of $.04 per share,
options to acquire an aggregate of 169,149 shares of common stock at an
exercise price of $.39 per share and options to acquire an aggregate of
704,788 shares of common stock at an exercise price of $.18 per share.
Although all of the aforementioned options have fully vested, all such
options are subject to a forbearance agreement, dated April 4, 2000
whereby these options may not be exercised until such time as our
authorized shares of common stock are increased by such number of shares
that equal or exceed, in the aggregate, all of the shares of common stock
issuable upon exercise of the options subject to the forbearance
agreement.
27
<PAGE>
(4) This amount includes (i) 171,200 shares of common stock which vest on
October 1, 2000 pursuant to a Restricted Stock Grant and (ii) options to
acquire an aggregate of 704,000 shares of common stock at an exercise
price of $.01 per share and options to acquire an aggregate of 133,333
shares of common stock at an exercise price of $.75 per share. Although
the options to acquire the aforementioned 704,000 shares of common stock
have fully vested, such options are subject to a forbearance agreement,
dated April 4, 2000 whereby these options may not be exercised until such
time as our authorized shares of common stock are increased by such number
of shares that equal or exceed, in the aggregate, all of the shares of
common stock issuable upon exercise of the options subject to the
forbearance agreement. Excludes 684,800 shares of common stock granted to
Mr. Fricks pursuant to a Restricted Stock Grant, all of which have not yet
vested.
(5) This amount includes 150,000 shares of common stock which vest on October
1, 2000 pursuant to a Restricted Stock Grant. Excludes 600,000 shares of
common stock granted to Mr. Christenson pursuant to a Restricted Stock
Grant, all of which have not yet vested.
(6) This amount includes options to acquire an aggregate of 538,084 shares of
common stock at an exercise price of $.04 per share, options to acquire an
aggregate of 225,531 shares of common stock at an exercise price of $.35
per share, and options to acquire an aggregate of 422,873 shares of common
stock at an exercise price of $.18 per share. Although all of the
aforementioned options have fully vested, all such options are subject to
a forbearance agreement, dated April 4, 2000 whereby these options may not
be exercised until such time as our authorized shares of common stock are
increased by such number of shares that equal or exceed in the aggregate
all of the shares of common stock issuable upon exercise of the options
subject to the forbearance agreement.
(7) This amount includes (i) 2,529,000 shares of common stock owned by Arkay
Enterprises (for which Mr. Kindland is the beneficial owner) and (ii)
options to acquire an aggregate of 666,667 shares of common stock at an
exercise price of $.75 per share. Ronald Kindland's address is 2675 Hazy
Hallow Run, Roswell, Georgia 30076.
(8) This amount excludes 899,957 warrants to purchase common stock at an
exercise price of $2.80 per share and 422,673 warrants to purchase common
stock at an exercise price of $.53 per share. Although all of the
aforementioned warrants have fully vested, all such warrants are subject
to a forbearance agreement, dated April 4, 2000 whereby these warrants may
not be exercised until such time as our authorized shares of common stock
are increased by such number of shares that equal or exceed in the
aggregate all of the shares of common stock issuable upon exercise of the
warrants subject to the forbearance agreement. Mr. Fitzgerald's address is
961 North Street, Greenwich, Connecticut 66831.
(9) Mr. O'Neal's address is 4260 Edgewater Drive, Kennesaw, Georgia 30144.
(10) Mr. Sauter's address is 3329 Collier Point, N.E., Dacula, Georgia 30019.
Item 13. Certain Relationships and Related Transactions
In December 1998, our Board of Directors approved an amendment to our
Certificate of Incorporation to effect a 1 for 7 reverse stock split. All per
share data and references to the numbers of shares have been retroactively
restated to give effect to the reverse stock split.
We entered in a share exchange agreement as of December 1, 1998
pursuant to which we acquired all of the issued and outstanding capital stock of
Pre-Cell Solutions, Inc., a Florida corporation in exchange for 32,156,000
shares of our common stock. Thomas Biddix, our Chief Executive Officer and
Chairman was the sole shareholder of Pre-Cell Solutions, Inc. a Florida
corporation.
28
<PAGE>
Also on December 1, 1998 we entered into an administrative services
agreement with Pre-Paid Solutions, Inc., a Florida corporation pursuant to which
Pre-Paid Solutions, Inc. performs all of our administrative functions including
accounting legal tax compliance and all other administrative functions. Pursuant
to the administrative services agreement we paid Pre-Paid Solutions One Thousand
Dollars ($1,000) per month. Pre-Paid Solutions is controlled by Thomas Biddix
our Chief Executive Officer and Chairman.
Prior to the commencement of employment, Harry Christenson, our Chief
Financial Officer performed consulting services in exchange for 265,625 shares
our common stock. The common stock was valued at $83,076.
On April 4, 2000 we acquired all of the outstanding capital stock of
Pre-Paid Solutions, Inc., a Florida corporation and owned by Thomas Biddix
(26.6%) and Timothy McWilliams (5.3%), our Chief Executive Officer and Chairman
and Executive Vice President and Director respectively, in exchange for
20,219,127 shares of common stock.
We sublease our corporate headquarters in Melbourne, Florida from
Thomas Biddix our Chief Executive Officer and Chairman. Our current rental rate
is $4,875 per month.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits and Financial Statement Schedules
(1) Financial Statements of the Company are set forth in Part II,
Item 8.
(2) Exhibits-- (See Index to Exhibits included elsewhere herein.)
(b) Reports on Form 8-K
We filed a Report on Form 8-K dated February 2, 2000 disclosing
the purchase of all of the issued and outstanding shares of capital
stock of Pre-Cell Solutions, Inc., a Florida corporation and the change
of auditors from Edward Isaacs & Company LLP to Vestal & Wiler, LLP.
We filed a Report on Form 8-K/A dated April 7, 2000 amending our
disclosure as to the change in our auditors from Edward Isaacs &
Company LLP to Vestal & Wiler, LLP.
We filed a Report on Form 8-K dated April 19, 2000 disclosing the
purchases of all of the issued and outstanding shares of capital stock
of US Intellicom, Inc. and Pre-Paid Solutions, Inc.
We filed a report on form 8-K/A dated July 19, 2000 amending the
disclosure of the purchases of US Intellicom, Inc. and Pre-paid
Solutions, Inc. by providing the required audited and pro forma
financial statements in connection with these acquisitions.
We filed a Report of Form 8-K dated July 14, 2000 disclosing a
change in our auditors from Vestal & Wiler, LLP to BDO Seidman, LLP.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
PRE-CELL SOLUTIONS, INC.
Date: August 14, 2000 By: /s/ Thomas E. Biddix
--------------------
Thomas E. Biddix
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dated indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas E. Biddix Chairman of the Board and Chief August 14, 2000
-------------------------- Executive Officer
Thomas E. Biddix (Principal Executive Officer)
/s/ Harry O. Christenson Chief Financial Officer August 14, 2000
-------------------------- (Principal Accounting and
Harry O. Christenson Financial Officer)
/s/ Timothy McWilliams Director August 14, 2000
--------------------------
Timothy McWilliams
/s/ Mark A. Krentzman Director August 14, 2000
--------------------------
Mark A. Krentzman
30
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit Description
--- -------------------
2.1 Merger and Reorganization Agreement among Pre-Cell, USI Merger Corp.,
USI and USI Stockholders (1)
2.2 Merger and Reorganization Agreement among Pre-Cell, Pre-Paid Merger
Corp., Pre-Paid and Pre-Paid Stockholders (1)
4.1 Stock Option Agreement for the purchase of 4,000,000 shares between
Pre-Cell and Thomas E. Biddix dated December 1, 1998(2)
4.2 Stock Option Agreement for the purchase of 3,000,000 shares between
Pre-Cell and Timothy F. McWilliams dated December 1, 1998 (2)
4.3 Stock Option Agreement for the purchase of 100,000 shares between
Pre-Cell and Tobin & Reyes, P.A. dated February 2, 2000 (2)
4.4 Consulting Agreement for the purchase of 265,625 shares between
Pre-Cell and Harry O. Christenson dated May 4, 1999 (2)
10.1 Share Exchange Agreement between Thomas E. Biddix and Transamerica
Petroleum Corporation(3)
10.2 Administrative Services Agreement between Pre-Cell Solutions, Inc., a
Florida corporation, and Pre-Paid Solutions, Inc.(3)
10.3 Sublease between Pre-Cell Solutions, Inc., a Florida corporation, and
Pre-Paid Solutions, Inc. dated September 1998 (3)
10.4 Employment Agreement between Pre-Cell Solutions, Inc., a Colorado
corporation, and Thomas Fricks dated April 1, 2000 (1)
10.5 Employment Agreement between Pre-Cell Solutions, Inc., a Colorado
corporation, and Jonathan O'Neal dated April 1, 2000 (1)
10.6 Stock Redemption Agreement between Pre-Cell Solutions, Inc., a Colorado
corporation, and Thomas E. Biddix dated April 1, 2000 (1)
10.7 Employment Agreement between Pre-Cell Solutions, Inc., a Colorado
corporation, and Thomas E. Biddix dated April 1, 2000 (1)
10.8 Employment Agreement between Pre-Cell Solutions, Inc., a Colorado
corporation, and Thomas E. Biddix dated April 1, 2000 (1)
16.1 Letter re: Change in Certifying Accountant (4)
23 Consent of Vestal & Wiler, P.A. *
27 Financial Data Schedule *
--------------------------
* Filed herewith
(1) Filed as an exhibit to the Registrant's report on Form 8-K
filed April 19, 2000.
(2) Filed as an exhibit to the Registrant's report on Form S-8
filed March 8, 2000.
(3) Filed as an exhibit to the Registrant's report on Form 10-K
filed February 2, 2000.
(4) Filed as an exhibit to the Registrant's report on Form 8-K
filed July 19, 2000
31
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
For the Year Ended April 30, 2000
32
<PAGE>
CONTENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEET F-2
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE (LOSS) F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-4
CONSOLIDATED STATEMENT OF CASH FLOWS F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Pre-Cell Solutions, Inc.
We have audited the accompanying consolidated balance sheet of Pre-Cell
Solutions, Inc. and Subsidiaries ("the Company") as of April 30, 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pre-Cell
Solutions, Inc. and subsidiaries as of April 30, 2000, and the consolidated
results of their operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has generated only minimal revenue, has incurred significant losses, and
has working capital and accumulated deficits. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the inability of the Company
to continue as a going concern.
As discussed in note 8 to the consolidated financial statements, the Company is
a defendant in various legal matters, the ultimate outcomes of which cannot
presently be determined. Accordingly, no provision for any liability that may
result therefrom has been made in the accompanying consolidated financial
statements.
/s/ BDO Seidman, LLP
August 3, 2000
New York, New York
F-1
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 2000
ASSETS
Current assets:
<S> <C>
Cash $ 383,333
Restricted cash 500,000
Accounts receivable 272,378
Inventory 186,875
Prepaid expenses 120,565
-------------
Total current assets 1,463,151
Furniture, fixtures and equipment, net of
accumulated depreciation of $7,919 343,175
-------------
Goodwill (net) 18,331,219
Other assets 107,554
-------------
Total assets $ 20,245,099
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 31,716
Accounts payable 505,847
Customer deposits 253,099
Due to shareholders 697,027
Accrued expenses 601,830
-------------
Total current liabilities 2,089,518
Commitments and contingencies -
Stockholders' equity:
Preferred stock, $.10 par value; 5,000,000 shares authorized - Common
stock, $.01 par value, 45,000,000 shares authorized;
39,736,859 shares issued and outstanding 397,368
Additional paid in capital 20,519,992
Accumulated other comprehensive income (loss) (3,894)
Accumulated deficit (2,757,885)
-------------
Total stockholders' equity 18,155,581
-------------
Total liabilities and stockholders' equity $ 20,245,099
=============
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the year ended April 30, 2000
<S> <C>
Revenues $ 358,113
Direct costs 196,173
Other expenses 865,981
Goodwill amortization 134,038
Impairment loss 388,520
-------------
Operating loss (1,226,599)
Interest and other expense 14,330
-------------
Net loss (1,240,929)
Other comprehensive income - foreign currency
translation adjustments (3,894)
-------------
Comprehensive income (loss) $ (1,244,823)
=============
Basic loss per common share $ (.04)
=============
Average number of basic common shares outstanding 34,365,210
=============
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended April 30, 2000
Common Stock Accumulated
-------------- Additional Other
Number Paid-In Comprehensive Accumulated
of Shares Amount Capital Loss Deficit Total
---------- ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance April 30, 1999 33,852,730 $ 338,527 $ 2,318,303 $ - $ (1,516,956) $ 1,139,874
Common stock issued
for services 265,625 2,656 80,420 - - 83,076
Common stock issued
for extinguishment
of debt 150,000 1,500 448,500 - - 450,000
Common stock options
granted for services 21,000 - - 21,000
Common stock retired (26,440,623) (264,406) 264,406 - - -
Exercise of common
stock options 250,000 2,500 7,500 - - 10,000
Common stock and
options issued for
acquisition of USI 11,440,000 114,400 6,186,613 - - 6,301,013
Common stock and
options issued
for acquisition of
Pre-Paid Solutions 20,219,127 202,191 11,193,250 - - 11,395,441
Other comprehensive
loss - - - (3,894) - (3,894)
Net loss - - - - (1,240,929) (1,240,929)
---------- ---------- ------------ ---------- ------------ ------------
Balance April 30, 2000 39,736,859 $ 397,368 $ 20,519,992 $ (3,894) $ (2,757,885) $ 18,155,581
========== ========== ============ ========== ============ ============
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended April 30, 2000
Cash flows from operating activities:
<S> <C>
Net loss $ (1,240,929)
Adjustments to reconcile net loss to net cash
used in by operating activities:
Depreciation and amortization 142,953
Impairment loss - long-lived assets 388,520
Common stock and options issued for compensation
and consulting services 104,077
Translation loss (3,894)
Changes in operating assets and liabilities (net of
effects of acquisitions):
Restricted cash (500,000)
Accounts receivable 8,801
Inventory (2,932)
Prepaid expenses and deposits (95,129)
Accounts payable and accrued expenses (57,569)
---------------
Net cash in operating activities (1,256,102)
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment (79,902)
Decrease in other assets 2,981
Cash acquired in acquisitions 3,581,396
---------------
Net cash provided by investing activities 3,504,475
Cash flows from financing activities:
Proceeds from the exercise of common stock options 10,000
Repayment against on notes payable (1,878,547)
---------------
Net cash used in financing activities (1,868,547)
---------------
Net increase in cash 379,826
Cash at beginning of year 3,507
---------------
Cash at end of year $ 383,333
===============
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-5
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For the year ended April 30, 2000
NATURE OF BUSINESS
The Company is a telecommunications product and services provider, offering
prepaid wireless, long distance and local services through distributors and
resellers. Prepaid wireless service allows consumers to acquire wireless access
without credit checks or the traditional contracts required for post-paid
services. A customer generally purchases a cellular phone and purchases access
by paying for service in fixed dollar amounts (e.g. $25 worth of airtime) in
advance of using the system. These increments of service can usually be
purchased by payment in cash or by approved check or credit card transactions.
The transactions eliminate the risk of receivables to the wireless provider.
Depending on the particular operator, some prepaid services include an actual
card or voucher that contains a prepaid account number used by the subscriber to
initiate access and add more airtime. Once subscribers begin using prepaid
airtime, their accounts are debited in real time. Each time a call is made the
system checks to ensure that the account contains available credit. When the
account has been depleted, subscribers are denied service and must replenish
their accounts. Through its wholly owned subsidiary, US Intellicom, Inc., the
Company provides wireless technology for use by airtime carriers and resellers.
US Intellicom has developed a proprietary handset-based technology that allows a
consumer to load minutes of prepaid airtime into a cellular phone directly from
the handset. The Company also provides customers local exchange and domestic and
international long distance telecommunication services through its wholly owned
subsidiary Pre-Cell Solutions, Inc., a Florida corporation.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Pre-Cell
Solutions, Inc. and its wholly owned subsidiaries, Pre-Cell Solutions (Florida),
Inc., Pre-Paid Solutions (Florida), Inc., Pre-Paid Solutions (Canada), Inc. and
US Intellicom, Inc. (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The accounts of Pre-Paid
Solutions (Canada), Inc. were translated into U. S. dollars using the
appropriate year-end rates for the balance sheet and the average rates during
the periods for the statements of operations.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. Significant
estimates include amounts for litigation, income taxes and amortization period
of goodwill.
CASH
Cash consists of bank deposits, which at times may exceed federally insured
limits. The Company has not experienced any losses in such accounts and believes
it is not subject to any significant credit risk on cash.
INVENTORIES
Inventories consisting primarily of cellular phone handsets and accessories are
valued at the lower of first-in, first-out (FIFO) cost or market.
LONG-LIVED ASSETS
Long-lived assets are recorded at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, generally
three to seven years.
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine the recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net cash flows
will be less than the carrying amount of the assets. Impairment is the amount by
which the carrying value of the asset exceeds its fair value. As a result, the
Company has taken a charge during the fourth quarter of 2000 in the amount of
$388,520 (see Note 3).
F-6
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For the year ended April 30, 2000
Expenditures for repairs and maintenance are charged to operations as incurred.
GOODWILL
The excess of purchase price over the fair value of the net assets acquired in a
business combination is accounted for as goodwill, which is being amortized over
twenty years utilizing the straight-line method.
REVENUE RECOGNITION
Revenue from the sale of cellular phones and accessories is recognized upon
shipment to independent distributors and dealers. Revenue from the resale of
prepaid cellular airtime is recognized when the consumer has implemented the
purchased code and resets the individual cellular phone unit meter. Technology
license income related to the individual cellular phone sets is recognized at
the time of shipment to the distributor or dealer. Continuing per unit royalties
are recognized when the consumer has implemented the related purchased code and
reset the individual cellular phone unit meter.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred. Advertising expense for
the year ended April 30, 2000 totaled approximately $9,857.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. Measurement
of deferred income tax is based on enacted tax rates and laws that will be in
effect when the differences are expected to reverse, with the measurement of
deferred income tax assets being reduced by a valuation allowance when
realization of deferred tax assets cannot be considered more likely than not.
F-7
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
1. ACQUISITIONS
During 2000, the Company acquired 100% of the outstanding stock of two
entities. Immediately prior to these acquisitions, 26,440,623 shares of the
Company's common stock were redeemed in order to facilitate the
acquisitions.
US Intellicom, Inc.
On April 4, 2000 (the "Closing Date"), Pre-Cell Solutions, Inc.
("Pre-Cell"), USI Merger Corp., a Georgia corporation and wholly-owned
subsidiary of Pre-Cell ("USI Merger Subsidiary"), US/Intellicom, Inc., a
Georgia corporation ("USI") and Ronald I. Kindland and each of the other
stockholders of USI ("USI Stockholders") executed a Merger And
Reorganization Agreement ("USI Merger Agreement"), pursuant to which USI
merged ("USI Merger") with and into USI Merger Corp.
In connection with the USI Merger, Pre-Cell issued an aggregate of
11,440,000 shares of Pre-Cell common stock to the stockholders of USI
determined on the basis of a negotiated value of the business and
proprietary technology developed by USI and the market value of Pre-Cell's
common stock. Under the terms of the agreement, the holders of USI common
stock were issued 8.8 shares of Pre-Cell common stock in exchange for each
share of USI common stock. In connection with the acquisition and as a
condition of closing, Pre-Cell established an option pool in the aggregate
of 2,133,333 shares of common stock whereby certain stockholders of USI
that had guaranteed USI's line of credit shall, until December 31, 2000,
have the right to acquire Pre-Cell common stock. As these options are
exercised the shareholder guarantees are released and the amount available
under the USI line of credit is reduced by a corresponding amount.
Additionally, all outstanding options to purchase USI shares became fully
vested and were automatically converted into options to purchase Pre-Cell
shares on a basis of 8.8 Pre-cell shares for each USI share entitled to be
purchased under the USI options, at the per share price equal to the
quotient of (i) the price contained in the USI options, divided by (ii)
8.8.
Pre-Paid Solutions
On the Closing Date, Pre-Cell, Pre-Paid Acquisition Corp., a Florida
corporation and wholly-owned subsidiary of Pre-Cell ("Pre-Paid Merger
Subsidiary"), Pre-Paid Solutions, Inc., a Florida corporation ("Pre-Paid")
and Thomas E. Biddix and each of the other stockholders of Pre-Paid
("Pre-Paid Stockholders") executed a Merger And Reorganization Agreement
("Pre-Paid Merger Agreement"), pursuant to which Pre-Paid was merged
("Pre-Paid Merger") with and into Pre-Paid Acquisition Corp.
In connection with the Pre-Paid Merger, Pre-Cell issued an aggregate of
20,219,127 shares of Pre-cell common stock to the stockholders of Pre-Paid
determined on the basis of a negotiated value of the business and certain
contracts of Pre-Paid and the market value of Pre-Cell's common stock.
Under the terms of the agreement, the holders of Prepaid common stock were
issued 2.81915 shares of Pre-Cell common stock in exchange for each share
of Prepaid common stock. Additionally, all outstanding options and warrants
to purchase Pre-Paid shares became fully vested and were automatically
converted into options and warrants to purchase Pre-Cell shares on a basis
of 2.81915 Pre-Cell shares for each Pre-Paid share entitled to be purchased
under the Pre-Paid options, at the per share price equal to the quotient of
(i) the price contained in the Pre-Paid options and warrants, divided by
(ii) 2.81915.
The acquisitions described above were accounted for by the purchase method
of accounting and accordingly, the operating results have been included in
the Company's consolidated results of operations from the date of
acquisition. The costs of the acquisitions have been allocated on the basis
of the estimated fair market values of the assets acquired and liabilities
assumed. The excess of the purchase prices over the fair values of the net
assets acquired was approximately $16,985,000 and has been recorded as
goodwill, which is being amortized on a straight-line basis over 20 years.
Accordingly, the accompanying consolidated statements of operations do not
include any revenues or expenses related to these acquisitions prior to the
closing date. Following are the Company's unaudited proforma results for
2000 assuming the acquisitions occurred on May 1, 1998:
F-8
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
2000 1999
Net revenues $ 4,417,281 $ 2,121,118
Net loss (3,928,714) (3,504,491)
Basic and diluted net loss per common share (.10) (.09)
Weighted average outstanding shares 39,148,838 39,071,234
The pro forma consolidated results of operations include adjustments to
give effect to amortization of goodwill. The unaudited pro forma
information is not necessarily indicative of the results of operations that
would have occurred had the purchase been made at the beginning of the
periods presented or the future results of the combined operations.
2. GOING CONCERN
The accompanying consolidated financial statements have been presented on
the basis that the Company is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has sustained a cumulative net loss of
approximately $2,800,000 through April 30, 2000 and had a working capital
deficiency and accumulated deficit of approximately $600,000 and
$2,800,000, respectively, at April 30, 2000. The financial statements do
not include any adjustments that might result from the Company's inability
to operate as a going concern.
Management's plans include the expansion of its prepaid cellular services
through continued growth in its distributor and dealer customer base and
acquisition of additional prepaid dial tone phone service areas to build
the volumes necessary to improve operating results.
Continuation of the Company as a going concern is dependent on its ability
to achieve profitable operations by increased revenues through its
distributor and dealer networks. In addition, the Company is pursuing
additional equity or debt financing in an effort to improve working
capital.
3. IMPAIRMENT LOSS
After the acquisition of USI and Pre-Paid, the Company decided to utilize
the technology developed, owned and operated by USI for the management of
prepaid cellular phone service in place of the technology owned by Pre-Paid
but operated by a third party. Based on this decision, the value of the
technology After owned by Pre-Paid was determined to be impaired and
accordingly was written down to its fair value of approximately $21,000.
This amount was the estimated amount that would be recovered through the
remaining contracts that would continue to use the Pre-Paid technology.
4. LINE OF CREDIT
The Company has a line-of-credit available under which it may borrow up to
$1,600,000 at an interest rate of 2.30% over the lender's commercial paper
rate. Additionally, the Company is required to pay an additional 10% in
interest expense ($5,598 for the year ended April 30, 2000) to the
guarantors of the debt based on the average line-of-credit balance for the
period, in which the guarantors are at risk. At April 30, 2000, there were
no borrowings under the line. The line expires on November 30, 2000.
F-9
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
5. NOTES PAYABLE
Notes payable consist of the following:
Equipment purchase obligations, due monthly,
interest at 14.25% to 14.64% $ 317
Installment note payable to vendor due monthly,
interest at 15.25% 31,399
--------
Less current maturities $(31,716)
========
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
Accrued claim (see Note 8) $380,000
Accrued interest 101,004
Accrued compensation 108,052
Accrued other 12,774
--------
$601,830
========
7. INCOME TAXES
There was no income tax expense/benefit for the Company for the year ended
Apri 30, 2000.
Following is a reconciliation of the expected income tax benefit to the
amount based on the U.S. statutory rate of 34% for the year ended April 30,
2000:
Income tax benefit based on U.S. statutory rate (423,239)
Goodwill amortization 21,761
---------
Current year addition to the valuation allowance (401,478)
Provision for income taxes $ -
=========
The components of deferred tax assets and liabilities are comprised of the
following at April 30, 2000:
F-10
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
Deferred tax assets:
Net operating loss carryforwards $ 1,303,000
Stock and stock options issued for services 10,800
Allowance for doubtful accounts 5,200
Accrued compensation and vacation 221,300
Furniture, fixtures and equipment 143,700
------------
Gross deferred income tax assets 1,684,000
Valuation allowance 1,684,000
------------
Net deferred tax assets -
============
At April 30, 2000, the Company has approximately $3,500,000 of net
operating loss carryforwards, which expire between 2018 and 2020. The Tax
Reform Act of 1986 enacted a complex set of rules (Section 382) limiting
the potential utilization of net operating loss carryforwards in periods
following a corporate "ownership change". In general, an ownership change
is deemed to occur if the percentage of stock of a loss corporation owned
(actually, constructively and, in some cases, deemed) by one or more
"5%stockholders" has increased by more than 50 percentage points over the
lowest percentage of such stock owned during a three year testing period.
Although a comprehensive evaluation has not yet been performed, it is
likely that due to prior shifts in ownership (Pre-Cell Solutions, Inc.
(Florida) merger) and current shifts in ownership (Pre-Paid Solutions, Inc.
and US Intellicom, Inc. mergers), the Company's ability to utilize its net
operating loss carryforwards could be severely limited.
The valuation allowance increased by $1,409,000 in the current year, of
which $964,000 represents the net operating loss carryforwards acquired
through Pre-Paid. The Company has recorded a valuation allowance to state
its deferred tax assets at estimated net realizable value due to the
uncertainty related to realization of these assets through future taxable
income. The recognition of any future tax benefits resulting from the net
operating loss carryforwards acquired will reduce any goodwill related to
the acquisition of Pre-Paid remaining at the time of such reduction.
8. COMMITMENTS AND CONTINGENCIES LEASES
The Company conducts its operations from leased facilities in Georgia,
Florida and Canada. In addition it leases various computers and telephone
equipment. These leases are classified as operating leases and expire on
various dates through 2003.
As of April 30, 2000 future minimum lease payments under the operating
leases are:
2001 $ 135,901
2002 133,587
2003 123,870
2004 120,426
2005 66,000
------
$ 579,784
Rent expense for the year ended April 30, 2000 totaled approximately
$43,600.
F-11
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its executive officers. The
agreements cover a three-year period beginning April 1, 2000 and are
terminable for cause by either party. They also include provisions for
discretionary bonuses and in one instance an incentive bonus for product
development. Certain of the agreements provide for the grant of a total of
1,606,000 shares of the Company's stock. The shares vest 20% on October 1,
2000, 30% on January 1, 2001 with the remaining 50% on April 1, 2001. The
Company has accrued compensation of $26,767 during the year as a result of
the stock grants. The remaining compensation expense of $776,233 as a
result of the stock grants will be recognized in 2001 as they become fully
vested. The agreements include a covenant against competition with the
Company and prohibit divulgence of confidential information.
LETTER OF CREDIT
The Company is contingently liable under the terms of a letter of credit of
up to $500,000 issued to secure credit from certain of its suppliers of
cellular phone airtime. The letter of credit is secured by a $500,000
certificate of deposit. As of April 30, 2000 there were no claims against
the letter of credit.
LITIGATION
On September 21, 1999, the two subsidiaries acquired during April 2000 were
named as defendants in two lawsuits alleging patent infringement arising
out of having made, used, offered for sale and/or sold in the United States
products which infringe one or more claims of Patent No. 5,631,947 and
Patent No. 5,577,100. The claims for monetary damages are undisclosed.
While any litigation or investigation has an element of uncertainty, in the
opinion of management and legal counsel, there is no reasonable probability
at present of any substantial liabilities arising out of this matter.
An action was brought against US Intellicom, Inc. (USI), a subsidiary of
the Company, by RiverHawk Capital Resources, Inc., an affiliate of
Riverhawk Holdings, Inc. (RiverHawk) before the American Arbitration
Association, claiming that it is entitled to a "success" fee in connection
with a letter agreement between the parties. On June 9, 2000 the Arbitrator
found that RiverHawk was entitled to a success fee of $374,517, plus
one-half of the costs and expenses of arbitration. The Company has accrued
$380,000 at April 30, 2000 and adjusted the purchase price of the
acquisitions discussed in Note 1. However, USI has filed a Motion to Vacate
the Decision of the Arbitrator.
9. STOCK OPTIONS
Prior to the May 1, 1999 the Board of Directors of the Company granted to
certain officers of the Company options to purchase shares of common stock
of the Company. These options were granted at the estimated fair market
value or above and were 100% vested at the time of grant. During the
current period the Company granted options to a supplier of professional
services and exchanged 3,893,860 options of the Company for outstanding
options of the acquired companies. At the same time, the Company granted
2,133,331 options to certain guarantors of one of the acquired company's
debt to Merrill Lynch which allows them to purchase stock in the Company
equal to the amount of debt that has been guaranteed.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for options issued to
employees. Accordingly, no compensation cost has been recognized for
options granted to employees at exercise prices that equal or exceed the
market price of the Company's common stock at the date of grant. Options
granted at exercise prices below market prices are recognized as
compensation cost measured as the difference between market price and
exercise price at the date of grant. Through April 30, 2000 no compensation
cost has been recognized.
As to the exchange of options during the current period, the Company
recognized, as part of the purchase price of the acquired companies (see
Note 1), the fair value of the options issued and the options issued to the
guarantors. The compensatory value of options granted to the supplier of
$21,000 was recorded as an expense in the current period.
F-12
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
The following table summarizes the stock option activity for the year ended
April 30, 2000:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Fair
Option Market
Shares Price Value
------ ----- -----
<S> <C> <C> <C>
Outstanding, April 30, 1999 7,000,000
Granted to supplier 100,000 $ .44 $ .21
Conversion of Pre-Paid Solutions options 2,133,860 .26 .30
Conversion of US Intellicom options 1,760,000 .31 .32
Issuance of US Intellicom debt guaranty
options 2,133,331 .75 $ .01
Retired (5,476,137) .04
Exercised (250,000) .04
------------
Outstanding, April 30, 2000 7,401,054
==========
</TABLE>
At April 30, 2000 a total of 3,767,517 options were exercisable at a
weighted average exercise price of $.61 and 3,633,537 options are subject
to a forbearance agreement under which the option holders have agreed not
to exercise any of their options until the Company has increased its total
number of authorized common shares.
The following table summarizes information about stock options outstanding
and exercisable at April 30, 2000.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted Weighted Weighted Weighted
Range of Average Average Average Average
Exercise Exercise Exercise Remaining Number Exercise
Price Outstanding Price Life Exercisable Price
----- ----------- ----- ---- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 0.01 to $ 0.18 3,457,524 $ 0.08 6.8 years 352,000 $ 0.01
$ 0.35 to $ 0.44 1,106,199 $ 0.37 3.7 years 711,519 $ 0.37
$ 0.75 2,837,331 $ 0.75 3.0 years 2,703,998 $ 0.75
--------- ------- --------- -------
7,401,054 $ 0.38 3,767,517 $ 0.61
========= ======= ========= =======
</TABLE>
As soon as the Company has increased the number of it's authorized common
shares all of the outstanding options will be exercisable.
10. STOCK WARRANTS
At April 30, 2000, the Company had the following stock warrants
outstanding:
Number of
Expiration Underlying Exercise
Date Shares Price
---- ------ -----
September 28, 2004 2,819,153 $ .53
April 3, 2003 3,509,832 $ 2.80
---------
6,328,985
=========
F-13
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
At April 30, 2000, all of the warrants were fully vested. However, they
were subject to a forbearance agreement whereby the warrant holders have
agreed not to exercise any warrants until the Company has increased its
total number of authorized common shares.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Certain supplemental disclosure of cash flow information and non-cash
investing and financing activities is as follows:
Cash paid for interest for the year $ 9,082
Common stock issued for extinguishment of debt $ 450,000
Common stock issued for services $ 83,076
Common stock options granted for services $ 21,000
In addition to the above non-cash items, the following is a summary of
non-cash transactions entered into for the acquisitions listed in Note 1:
Common stock and stock options issued as
consideration $ 17,696,454
------------
Accounts receivable acquired 278,179
Inventory acquired 183,941
Prepaid expenses acquired 20,436
Property, plant and equipment acquired 658,995
Goodwill acquired 16,984,950
Other asset acquired 129,104
------------
Total non-cash acquisition of assets 18,255,605
Notes payable assumed 2,325,463
Accounts payable assumed 1,002,270
Accrued liabilities assumed 778,014
Long-term debt assumed 34,800
------------
Total non-cash assumption of liabilities 4,140,547
------------
Net cash acquired $ 3,581,396
============
12. RELATED PARTY TRANSACTIONS
Prior to commencement of employment, the Company received consulting
services from the Chief Financial Officer of the Company in exchange for
265,625 shares of common stock. The transaction was valued at $83,076.
Prior to acquisition, the Company subleased office space from Pre-Paid
Solutions, Inc. The agreement called for monthly rental payments of
approximately $500. Total rent for the year ended April 30, 2000
approximated $4,400.
The Company also had an administrative services agreement with Pre-Paid
Solutions, Inc. which provided for fees of approximately $1,000 per month.
Total fees under this agreement for the year ended April 30, 2000 totaled
$9,000.
F-14
<PAGE>
PRE-CELL SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended April 30, 2000
13. SUBSEQUENT EVENTS
Subsequent to April 30, 2000, the Company entered into an agreement to
acquire all of the outstanding shares of Teleconex, Inc., a prepaid local
exchange service company in Pensacola, Florida, for 683,333 shares of
Pre-Cell common stock plus cash of $160,000. The closing of the transaction
is subject to regulatory approval. In addition, the Company has entered
into a nonbinding letter of intent to acquire a competitive local exchange
company located in San Antonio, Texas. Consummation of the merger remains
subject to, among other things, regulatory approval, due diligence,
execution of a definitive agreement and the approval by the parties' board
of directors.
F-15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Pre-Cell Solutions, Inc.
Melbourne, Florida
We have audited the accompanying consolidated balance sheets of Pre-Cell
Solutions, Inc. (A Colorado corporation) as of April 30, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
April 30, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Certified Public Accountants
November 12, 1999
F-15
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC.
(A COLORADO CORPORATION)
CONSOLIDATED BALANCE SHEETS
April 30, 1999 and 1998
ASSETS
1999 1998
------------- -------------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 507 $ -
Certificate of deposit, 4.26% matures June 28, 2000 3,000 -
Stock subscription receivable 3,000 -
Prepaid Service Fees 5,000 -
------------- -------------
TOTAL CURRENT ASSETS 11,507 -
------------- -------------
EQUIPMENT - net of accumulated
Depreciation of $150 1,713 -
------------- -------------
INTANGIBLE ASSETS - net of accumulated amortization
OF $43,000 (Note 2) 1,480,302 -
------------- -------------
$ 1,493,522 $ -
============= =============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------ ------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 5,003 $ -
Accrued liabilities 82 -
Due to stockholders/officers (Note 4) 330,000 -
Due to Related Party (Note 4) 18,563 -
------------- -------------
TOTAL CURRENT LIABILITIES 353,648 -
------------- -------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred Stock - $.10 par value;
5,000,000 shares authorized;
none outstanding - -
Common Stock - $.01 par value;
45,000,000 shares authorized 338,484 118,470
Additional paid-in capital 2,318,346 1,252,120
Accumulated Deficit (1,516,956) (1,370,590)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,139,874 -
------------- -------------
$ 1,493,522 $ -
============= =============
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC.
(A COLORADO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30, 1999 and 1998
1999 1998
------------- -------------
<S> <C> <C>
REVENUE $ 22,936 $ -
COST OF REVENUE 17,340 -
------------- -------------
GROSS PROFIT 5,596 -
GENERAL AND ADMINISTRATIVE EXPENSES 151,962 -
------------- -------------
NET LOSS $ (146,366) $ -
============= =============
LOSS PER SHARE $ (.01) $ -
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,999,623 11,846,985
============= =============
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC.
(A COLORADO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended April 30, 1999 and 1998
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (146,366) $ -
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 150 -
Amortization 43,000 -
Net increase (decrease) in cash flows from changes in:
Prepaid service fees (5,000) -
Stock subscription receivable (3,000) -
Other (6,062) -
Accounts payable 5,003 -
Accrued liabilities 82 -
Due to stockholders/officers 50,000 -
Due to Related Party 18,563 -
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (43,630) -
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificate of deposit (3,000) -
Sale of certificate of deposit 12,000 -
Purchase of Equipment (1,863) -
------------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 7,137 -
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
ISSUANCE OF COMMON STOCK OF SUBSIDIARY 37,000 -
NET CASH FLOW FROM FINANCING ACTIVITIES 37,000 -
------------- -------------
NET INCREASE IN CASH 507 -
CASH - BEGINNING OF YEAR - -
------------- -------------
CASH - END OF YEAR $ 507 $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On December 1, 1998, the Company issued 31,328,910 shares of common
stock for the net liabilities of Pre-Cell Solutions, Inc., a Florida
Corporation, and 827,090 of common stock for services rendered.
Additionally, the Company declared a 1 for 7 stock split.
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
<TABLE>
<CAPTION>
PRE-CELL SOLUTIONS, INC.
(A COLORADO CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended April 30, 1999 and 1998
COMMON STOCK Additional
Shares Paid-In Accumulated
OUTSTANDING AMOUNT CAPITAL DEFICIT TOTAL
------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE - April 30, 1997 11,846,985 $ 118,470 $ 1,252,120 $ (1,370,590) $ -
NET INCOME - - - - -
------------- ------------ ------------- ------------- --------------
BALANCE - April 30, 1998 11,846,985 118,470 1,252,120 (1,370,590) -
Effect of 1 for 7 stock split (10,150,255) (101,546) 101,546 - -
Issuance of stock in exchange for
the stock in Pre-Cell Solutions, Inc.
(a Florida corporation) 31,328,910 313,289 939,867 - 1,253,156
Issuance of common stock for
services rendered 827,090 8,271 24,813 - 33,084
NET LOSS - - - (146,366) (146,366)
------------- ------------ ------------- ------------- --------------
BALANCE - APRIL 30, 1999 33,852,730 $ 338,484 $ 2,318,346 $ (1,516,956) $ 1,139,874
============= ============ ============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
PRE-CELL SOLUTIONS, INC.
(A COLORADO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended April 30, 1999 and 1998
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Pre-Cell Solutions, Inc. (the Company) f/k/a
Transamerican Petroleum Corporation ("Transamerican"), was
incorporated in Colorado in 1981. The Company, located in
Melbourne, Florida, operates as a competitive local exchange
carrier (CLEC), utilizing Bell South interconnection services.
Such local telephone service is provided throughout Florida.
Prior to December 1, 1998, the Company had been virtually
inactive since 1995.
PRINCIPLES OF CONSOLIDATION - These consolidated financial
statements present the Company and its wholly-owned
subsidiary, Pre-Cell Solutions, Inc., a Florida corporation.
All intercompany transactions and balances have been
eliminated.
USE OF ESTIMATES - The preparation of the consolidated
financial statements in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from
those estimates.
CASH - Cash consists of bank deposits, which at times may
exceed federally insured limits.
EQUIPMENT - Equipment is recorded at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the assets, generally five years. Expenditures
for repairs and maintenance are charged to operations as
incurred.
GOODWILL - The excess of purchase price over net liabilities
acquired in a business combination is accounted for as
goodwill, which is being amortized over fifteen years
utilizing the straight-line method.
INCOME TAXES - The Company accounts for income taxes pursuant
to Statement of Financial Accounting Standards No. 109 (SFAS
109). SFAS 109 requires the recognition of deferred tax assets
and liabilities and adjustments to deferred tax balances for
changes in tax law and rates. In addition, future tax benefits
such as net operating loss carryforwards are recognized to the
extent recognition of such benefits is more likely than not.
F-20
<PAGE>
PRE-CELL SOLUTIONS, INC.
(A COLORADO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended April 30, 1999 and 1998
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
EARNINGS OR LOSS PER SHARE - Earnings or loss per share is
computed based on the weighted average number of common shares
outstanding. The number of shares used in computing the loss
per common share at April 30, 1999 and 1998 was 14,999,623 and
11,846,985, respectively.
NOTE 2 ACQUISITION
On December 1, 1998, the Company exchanged 31,328,910 shares
of its common stock for the outstanding common stock of
Pre-Cell Solutions, Inc., a Florida corporation in a
transaction accounted for as a purchase. The total purchase
price approximated $1,523,000. The excess of the purchase
price over the net liabilities assumed is accounted for as
goodwill.
NOTE 3 INCOME TAXES
At April 30, 1999 and 1998, the Company has approximately
$370,000 of net operating loss carryforwards expiring through
2014, which would have resulted in a deferred tax asset of
approximately $275,000 at April 30, 1999 and 1998. The Company
has not recognized the deferred tax asset applicable to the
carryforward as the balance is offset by a valuation
allowance.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company leases its offices from a related party under a
sublease. The agreement calls for monthly rental payments
totaling approximately $500 with annual renewal options
through June, 2001. Total rent for the year ended April 30,
1999 approximated $4,600 and is included in current
liabilities at April 30, 1999.
The Company has entered into an administrative services
agreement with a related party totaling $1,000 per month
through June 30, 2001. Total fees under this agreement for the
year ended April 30, 1999 totaled $10,000 and is included in
current liabilities at April 30, 1999.
F-21
<PAGE>
PRE-CELL SOLUTIONS, INC.
(A COLORADO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended April 30, 1999 and 1998
NOTE 4 RELATED PARTY TRANSACTIONS - Continued
The Company has entered into employment agreements with two
stockholders/officers. Such agreements require annual payments
totaling $180,000 and $95,000, respectively, to each executive
per year through June 30, 1999. Fees under this agreement
totaled $330,000 and are included in current liabilities.
Additionally, the agreements provide for the executives to
receive a total of 4,000,000 and 3,000,000 options,
respectively to purchase common stock at $.04 per share. These
options vest on December 1, 1999 and are exercisable for a
term of five years.
NOTE 5 CONTINGENCIES
The Company is an over-the-counter (OTC) bulletin board
company. In July, 1999, the Company changed its trading symbol
from TAMP to TDCM. However, the Company remains delinquent in
its S.E.C. filings; the last Form 10-K was filed for the year
ended June 30, 1995.
Additionally, the Company is delinquent in its filings with
the Internal Revenue Service.
The effects, if any, of any penalties relating to the above
are not reflected in these consolidated financial statements.
NOTE 6 YEAR 2000 (UNAUDITED)
Management has assessed the Company's exposure to date
sensitive computer hardware and software programs that may not
be operative subsequent to 1999 and has implemented a
requisite course of action to minimize Year 2000 risk and
ensure that neither significant costs nor disruption of normal
business operations are encountered. However, because there is
no guarantee that all systems of outside vendors or other
entities affecting the Company's operations will be 2000
compliant, the Company remains susceptible to consequences of
the Year 2000 Issue.
F-22
